10-Q

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

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 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

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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	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.

4

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	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.

5

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	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.

6

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

							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.

7

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	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.

8

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.

9

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.

10

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.

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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

Volume discount

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.

12

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:

			June 30, 2006				December 31, 2005
			Gross				Gross
			Carrying		Accumulated		Carrying		Accumulated
	Useful Lives		Amount		Amortization		Amount		Amortization
Intangible assets subject to amortization:
Customer relationship intangibles		5-10 years	$	68,319	$	7,645	$	63,335	$	3,693
Intangible assets not subject to amortization:
Goodwill			$	3,027	$	—	$	—	$	—

13

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	)

14

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

15

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.

16

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

17

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

18

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.

19

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

(1) Loss per weighted average common share amounts are rounded to the nearest $.01; therefore, such rounding may impact individual amounts presented.

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.

20

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.

21

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.

22

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.

23

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.

24

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.

25

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.

26

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.

27

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.

28

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.

29

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.

30

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.

31

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	)

Three Months ended June 30, 2006 and 2005

On a consolidated basis, the increase in revenues is primarily due to $73.6 million revenues from EDC, offset in part by a decrease in Messaging revenue which was primarily caused by decreased product revenue from reduced volume of domestic sales. The improvement in gross margin was primarily due to $10.4 million of gross margin from EDC offset by Messaging’s $3.7 million decline in gross margin resulting primarily from a change in the mix of products sold, with a higher volume of sales of lower margin products. Operating income declined primarily due to a loss from EDC and decreased gross margins and increased operating expenses in Messaging.

32

EDC

Revenues. EDC’s product sales revenues for the second quarter of 2006 were $55.0 million, and distribution services revenues were $18.6 million. International revenues comprised 52% of total EDC revenue for the quarter. Universal individually accounted for approximately 87% of EDC’s revenue. Product sales in the second quarter of 2006 included $1.1 million, net, relating to pricing changes and volume rebates applied from the date of the acquisition (May 2005). Under the terms of the supply agreements with Universal Music, the parties had one year to challenge various terms in the contract, including the 2003 costs that formed the basis for the fixed CD pricing. During the second quarter we reached agreement with Universal on the revised pricing. The first half of each calendar year is typically the lowest point in the revenue cycle in the entertainment industry. We expect revenue growth in the remainder of 2006 to be driven by reversionary business from Universal, by additional third party business and by the newly acquired Blackburn, U.K. CD manufacturing operation.

Gross Margins on Product Sales and Services. Gross margin for the second quarter of 2006 on EDC product revenues was $6.3 million, or 11% of product revenues, and on EDC distribution services revenues were $6.8 million or 37% of service revenues. Gross margins were favorably impacted in the second quarter of 2006 by the retroactive pricing adjustments described above and to benefits from previously implemented cost improvements. EDC’s gross margins are impacted by the seasonality of the music business, with lower margins in the first half of the year, and higher margins during the second half of the year due to leverage on fixed costs during the peak season.

Operating Income (Loss). Operating income (loss) includes the amortization of the intangible assets (primarily 10-year manufacturing and distribution services agreements that EDC entered into with Universal as part of the EDC acquisition, and agreements with various central European customers). Selling, general and administrative expense includes marketing costs related to the establishment of a sales function to solicit new third party business, costs associated with EDC’s implementation of internal control over financial reporting and preparation for the assessment required by Section 404 of the Sarbanes Oxley Act of 2002, and acquisition activities expenditures. During the second quarter of 2006 and 2005 we recorded $646,000 and $807,000, respectively, of compensation expense relating to the award of profits interests to EDC management. Operating loss in the second quarter of 2005 included $800,000 of acquisition related charges.

Income (Loss) from Continuing Operations before Tax. Loss from continuing operations before tax for the second quarter of 2006 is primarily due to interest expense and unrealized loss on the currency rate swap. EDC interest expense in the second quarter of 2006 included approximately $759,000 of interest expense related to the term loan with Wachovia Bank and approximately $553,000 of imputed interest related to the deferred acquisition payments due to Universal. A loss on currency swaps of $1.6 million was recorded as a result of an increase in the forward-looking Euro rate at June 30, 2006. This loss was partially offset by a $631,000 transaction gain relating primarily to the translation of an inter-company loan with our German subsidiary. The remaining amounts relate to capital lease implied interest and amortization of debt issue costs.

Income (Loss) from Continuing Operations. Loss from continuing operations for the second quarter of 2006 included income tax expense related to the international operations, principally in Germany. EDC’s profits earned in the U.S. are not subject to income tax due to the utilization of significant tax loss carryforwards.

33

Messaging

Revenues. Messaging revenues decreased 28.0% in the second quarter of 2006 as compared to the second quarter of 2005 due to reduced domestic and international sales volume. Revenues from our domestic customers decreased 12% to $10.8 million in the second quarter of 2006 as compared to $12.3 million in the second quarter of 2005. International revenues decreased 46% to $5.6 million in the second quarter of 2006 as compared to $10.4 million in the second quarter of 2005. The revenue in the second quarter of 2005 included a significant sale to MTN, a new international customer. During the second quarter of 2006, three customers individually accounted for approximately 18%, 16% and 14% of total revenue from continuing operations. During the second quarter of 2005, four customers individually accounted for 30%, 16%, 15% and 11% of total revenue from continuing operations.

Gross Margins on Product Sales and Services. The decrease in gross margin dollars of $3.7 million for the second quarter of 2006 compared to the second quarter of 2005 was due primarily to reduced volume of sales. Gross margin on products sold (product margin) was 58% for both the second quarter of 2006 and 2005. The gross margin percentage for services (service margin) in the second quarter of 2006 was 44% compared to 48% in the second quarter of 2005.

Operating Income (Loss). The operating loss for the second quarter of 2006 of ($1.7) million was primarily a result of decreased gross margin dollars. During the second quarter of 2006 we reduced Messaging’s operating expenses by approximately $1.2 million. Our operations have been reorganized in the third quarter of 2006 to bring them in-line with reduced domestic sales while maintaining adequate resources to serve 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.

Income (Loss) from Continuing Operations before Tax. Income (loss) from continuing operations before tax was impacted by the decrease in gross margin and changes in operating expenses discussed above.

Income (Loss) from Continuing Operations. Income (loss) from continuing operations was impacted by the changes discussed above and to provisions for income taxes that relate to international operations. Although the segment’s U.S. operations were profitable in 2005, no income tax provision was recorded due to net operating loss carryforwards (“NOLs”) available in the U.S. that we used to offset taxes payable for such period.

Six Months ended June 30, 2006 and 2005

On a consolidated basis, the 191% increase in revenues is primarily due to $143.7 million revenues from EDC for the six months ended June 30, 2006 as compared to $20.0 million for six months ended June 30, 2005 due to the inclusion of only one month of EDC operations in the 2005 period. The 19.5% decrease in Messaging revenue was primarily due to decreased domestic and international revenue from reduced volume of system sales. The improvement in consolidated gross margin was primarily due to $20.8 million from EDC offset by Messaging’s $6.3 million decline resulting primarily from a change in the mix of products sold, with a higher volume of lower margin products. Operating income declined primarily due to a loss from EDC and decreased gross margins and increased operating expenses in Messaging.

34

EDC

Revenues. EDC’s product sales revenues for the first half of 2006 were $104.7 million, and distribution services revenues were $39.0 million. International revenues comprised 51% of total EDC revenue for the period. Universal individually accounted for approximately 86% of EDC’s revenue. The first half of each calendar year is typically the lowest point in the revenue cycle in the entertainment industry. We expect revenue growth in the remainder of 2006 to be driven by reversionary business from Universal, by additional third party business and by the newly acquired Blackburn, U.K. CD manufacturing operation.

Gross Margins on Product Sales and Services. Gross margin for the first half of 2006 on EDC product revenues was $11.7 million or 11.0% of product revenues, and on EDC distribution services revenues were $11.8 million or 30% of service revenues. EDC’s gross margins are impacted by the seasonality of the music business, with lower margins in the first half of the year, and higher margins during the second half of the year due to leverage on fixed costs during the peak season.

Operating Income (Loss). EDC operating loss for the first half of 2006 was $3.1 million compared to a loss of $2.5 million for the first half of 2005. Operating loss includes amortization of the intangible assets (10-year manufacturing and distribution services agreements that EDC entered into with Universal as part of the EDC acquisition, and agreements with various central European customers). Selling, general and administration expense include marketing costs related to the establishment of a sales function to solicit new third party business, costs associated with EDC’s implementation of internal control over financial reporting and preparation for the assessment required by Section 404 of the Sarbanes Oxley Act of 2002, non-recurring recruiting, relocation, and transition costs related to the restructuring of the operations in the U.S., and potential acquisition activities expenditures. During the first half of 2006 and 2005 we recorded $823,000 and $807,000, respectively, of compensation expense relating to the award of profits interests to EDC management. Operating loss in the first half of 2005 included approximately $800,000 of acquisition related charges.

Income (Loss) from Continuing Operations before Tax. Loss from continuing operations before tax for the first half of 2006 is primarily due to interest expense and unrealized loss on currency swap. EDC interest expense in the first half of 2006 included approximately $1.4 million of interest relating to the term loan with Wachovia Bank and approximately $1.1 million of imputed interest related to the deferred acquisition payments due to Universal. A loss on currency swaps of $2.4 million was recorded as a result of an increase in the forward-looking Euro rate at June 30, 2006. This loss was partially offset by a $1.0 million transaction gain relating primarily to the translation of an inter-company loan with our German subsidiary. The remaining amounts relate to capital lease implied interest, amortization of debt issue costs and other.

Income (Loss) from Continuing Operations. Loss from continuing operations in the first half of 2006 included income tax expense related to the international operations, principally in Germany. EDC’s profits earned in the U.S. are not subject to income tax due to the utilization of significant tax loss carryforwards.

35

Messaging

Revenues. Messaging revenues decreased 19.5% to $32.8 million in the first half of 2006 compared to $40.7 million in the first half of 2005 due to reduced volume of legacy product sales and a decline in Glenayre Care renewals partially offset by higher ICE product sales and service revenue. Revenues from our domestic customers decreased 15.9% to $23.8 million from $28.3 million in the first six months of 2006 as compared to the first six months of 2005. International revenues decreased 27.6% to $8.9 million from $12.3 million in the first six months of 2006 as compared to the first six months of 2005, and accounted for 27% and 30% of total net sales in those periods, respectively. During the first half of 2006, three customers individually accounted for approximately 16%, 15%, and 14% of total revenue from continuing operations. During the first half of 2005, four customers individually accounted for 21%, 19%, 17% and 11% of total revenue from continuing operations.

Gross Margins on Product Sales and Services. The decrease in gross margin dollars of $6.3 million for the first six months of 2006 was due primarily to reduced sales volume. Additionally, a change in the mix of products sold negatively impacted gross margin slightly. Gross margin on products sold (product margin) was 57% for the first six months of 2006 compared to 63% for the same period last year. The lower margin in the first six months of 2006 was offset by revenue of $1.4 million recognized in the first quarter related to undelivered elements of a multi element contract that had been deferred during 2004 and 2005. During the first half of 2006, the customer provided confirmation that no additional elements were required, and we were able to recognize this remaining revenue with no associated cost. The gross margin percentage for services (service margin) was 45% in the first half of both 2006 and 2005.

Operating Income (Loss). The operating loss of $4.6 million for the first six months of 2006 compared to operating income of $2.4 million for the first six months of 2005 was primarily a result of decreased gross margin dollars. During the second quarter of 2006 we reduced Messaging’s operating expenses by approximately $1.2 million. Our operations have been reorganized in the third quarter of 2006 to bring them in-line with reduced domestic sales while maintaining adequate resources to serve 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.

Income (Loss) from Continuing Operations before Tax. Income (loss) from continuing operations before tax was impacted by the decrease in gross margin and changes in operating expenses discussed above.

Income (Loss) from Continuing Operations. Income (loss) from continuing operations was impacted by the changes discussed above and to provisions for income taxes that relate to international operations. Although the segment’s U.S. operations were profitable in 2005, no income tax provision was recorded due to NOLs available in the U.S. that we used to offset taxes payable in such period.

Financial Condition and Liquidity

Overview. At June 30, 2006, we had cash, cash equivalents and restricted cash totaling $90.8 million. Restricted cash of $24.0 million at June 30, 2006 consisted primarily of balances held in escrow to fund EDC pension and other debt obligations. Our principal source of liquidity was our $66.8 million cash and cash equivalents balances. Our cash generally consists of money market demand deposits and our cash equivalents generally consist of high-grade commercial paper, bank certificates of deposit, treasury bills, notes or agency securities guaranteed by the U.S. government, and repurchase agreements backed by U.S. government securities with original maturities of three months or less. EDC has a senior credit facility with Wachovia Bank consisting of a five-year term loan with an outstanding balance of $41.5 million and a $10.0 million revolving line of credit. At June 30, 2006, no drawings were made against the $10.0 million line of credit that is available as a source of liquidity, if required. Collateral previously pledged to secure this bank debt in the amount of $16.5 million was released on June 21, 2006.

36

We expect to use cash and cash equivalents for working capital, investments in capital equipment, and other general corporate purposes, including the expansion and development of our existing products and markets, as well as to fund potential acquisitions.

At June 30, 2006, approximately $2.4 million in discontinued operations liabilities remained outstanding of which we anticipate approximately $0.1 million to be paid during the remainder of 2006. The remaining balance relates to estimated international business tax obligations. We are waiting for tax clearance and expect the process to be resolved before the end of the calendar year.

Operating Activities. Cash used in operating activities was the result of the year to date net loss offset by depreciation and amortization and other cash flow adjustments, including the significant activity described below:

Cash provided by operating activities as of June 30, 2006 included:

o Cash received from Universal related to the long-term receivable established as part of the EDC acquisition,

o Payment of pension and employee savings plan maturities with restricted cash set aside for that purpose, and

o Shipment of inventory in the Messaging segment combined with reduced purchases and production volume in response to lower sales volumes.

Cash used in operating activities as of June 30, 2006 included:

o Increased accounts receivable balances primarily due to increased EDC sales volume in the second half of June of 2006, partially offset by Messaging collections and reduced sales volume,

o Repayment of an advance from Universal for purchase of printed materials,

o Decreased Messaging deferred revenue resulting from the completion of delivery and installation of prior year invoiced transactions,

o EDC accounts payable balance reduction related to decreased manufacturing volume for the month of June, 2006 compared to the seasonal peak in December, 2005, and

o Payment of the 2005 incentive bonuses.

Investing Activities. During the six months ended June 30, 2006 we spent $7.4 million on equipment primarily for EDC’s operations. Additionally, a manufacturing printer utilized by EDC was purchased under a capital lease for approximately $1.0 million. We anticipate that property, plant and equipment purchases related to our continuing operations for the remainder of 2006 will approximate $10.9 million of which $10.0 million relates to EDC and $0.9 million relates to Messaging.

Financing Activities. During the six months ended June 30, 2006, we remitted to Universal $8.1 million of the deferred purchase price related to the acquisition of EDC. We also remitted payment of pension and employee savings plan maturities using restricted cash set aside for that purpose.

We received approximately $1.1 million in connection with common stock purchases under the Company’s Employee Stock Purchase Plan and as a result of the exercise of options. Additionally, we increased contributed capital by approximately $785,000 related to stock compensation expense and related items.

Income Tax Matters. Our recent cash outlays for income taxes have been limited primarily to foreign income taxes. 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. However, 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.

37

These NOLs begin to expire during 2006 as noted in the table below.

	Expiration of NOLS (In millions)
	Unrestricted		Restricted		INT’L*		TOTAL
	U.S		U.S
2006	$	—	$	0.2	$	—	$	0.2
2007		—		1.8		—		1.8
2008		—		3.3		—		3.3
2009		—		3.8		3.7		7.5
2010		—		5.9		41.4		47.3
2011		—		9.0		—		9.0
2012		—		9.4		—		9.4
2019		44.3		—		—		44.3
2020		50.6		—		—		50.6
2021		65.0		—		—		65.0
2022		13.4		—		—		13.4
2023		20.7		—		—		20.7
2024		48.4		—		—		48.4
2025		1.1		—		—		1.1
TOTAL	$	243.5	$	33.4	$	45.1	$	322.0

*International NOL’s are primarily related to Canada.

Income taxes payable include $8.5 million at June 30, 2006 for probable and estimable exposure for tax filing positions in various jurisdictions. At June 30, 2006 this amount included $6.3 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 the international business taxes and expect this uncertainty to be resolved before the end of the calendar year.

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.

Summary. We believe that our current cash reserves together with our ability to establish borrowing arrangements will be sufficient to (i) support the short-term and long-term liquidity requirements for current operations (including annual capital expenditures) and discontinued operations and (ii) make potential acquisitions and strategic investments.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

38

In Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, we discussed the critical accounting policies that affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. Other than the adoption of FAS 123R, we believe that there have been no significant changes to such critical accounting policies and estimates during the six months ended June 30, 2006.

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 over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating awards expected to vest including type of awards, employee class, and our historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

We use the Black-Scholes-Merton valuation model to determine the fair value of our stock options. Significant judgment is required in determining the inputs to the model including the expected volatility, the expected life, and the risk free interest rate. Changes in the input assumptions, can materially affect the fair value estimate of our stock options.

Other Business Developments

On March 1, 2006, EDC entered into a non-binding Letter of Intent and Exclusivity Agreement to acquire Australian DVD/CD manufacturer and distributor AAV Regency (“AAVR”). The Letter of Intent provides for a 90-day exclusivity period during which AAVR will negotiate exclusively with EDC with regard to an acquisition. This exclusivity period has expired without extension. We have not reached terms acceptable to both parties as of this filing, but continue to talk with AAVR.

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 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk arising from adverse changes in interest rates, foreign exchange and stock market volatility. We do not enter into financial investments for speculation or trading purposes. We are not a party to any financial or commodity derivatives except for a cross-currency rate swap. Our exposure to market risk was discussed in the Quantitative and Qualitative Disclosures About Market Risk section of our Annual Report on Form 10-K for the year ended December 31, 2005. There have been no material changes to such exposure during the first half of 2006.

39

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, due to the existence of the material weakness in the Company’s internal control over financial reporting discussed below, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2006. The Company’s Chief Executive Officer and Chief Financial Officer have certified that, to their knowledge, the Company’s consolidated financial statements included in this quarterly report on Form 10-Q fairly present in all material respects the financial condition, results of operations and cash flows of the Company for the periods presented.

As discussed in Item 9A of the Company’s 2005 annual report on Form 10-K, in assessing the Company’s internal control over financial reporting as of December 31, 2005, management determined that the Company did not have effective internal control over financial reporting as of December 31, 2005. The Company concluded that its internal controls were ineffective as a result of an identified material weakness in internal controls over revenue recognition for Messaging. The internal control weakness primarily related to insufficient staffing resources with the knowledge, experience and training in the application of generally accepted accounting principles, as applied to revenue recognition for multi-element contracts, and was attributed primarily to staff turnover and changes in responsibilities. As discussed below and disclosed in the Company’s 2005 Annual Report, the Company has initiated certain corrective actions to remediate this material weakness and continued such efforts during the quarter ended June 30, 2006.

As previously disclosed, during the fourth quarter of 2005 and the first quarter of 2006, the Company hired personnel trained and experienced in the complex accounting areas of revenue recognition and revenue accounting including a divisional controller and a director of financial analysis, made additional training in this complex area mandatory for finance and other key personnel and enhanced the Company’s revenue recognition policies, procedures and controls. During the second quarter of 2006, the Company continued implementing the corrective actions described above by having members of financial management attend outside revenue recognition training and by hosting internal revenue recognition training for members of financial and non-financial departments.

During the quarter ended June 30, 2006 there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In accordance with guidance promulgated by the Office of the Chief Accountant of the Division of Corporate Finance of the Securities and Exchange Commission on June 24, 2004, the Company has excluded EDC from its assessment of changes in internal controls at December 31, 2005, the operations of which consist entirely of the CD and DVD manufacturing and distribution operations acquired from Universal Music Group on May 31, 2005.

PART II – OTHER INFORMATION

ITEMS 1A, 2, 3 and 5 are inapplicable and have been omitted.

ITEM 1. LEGAL PROCEEDINGS

See Note 13 to the unaudited condensed consolidated financial statements in Part I, Item 1, which discusses material pending legal proceedings to which the Company is party and is incorporated herein by reference.

40

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

At the Company’s Annual meeting of Stockholders held on May 23, 2006, the following matters were submitted to a vote of the stockholders of the Company and the results were as follows:

(i) The election of the three directors each to serve a three-year term expiring 2009:

Nominees	Shares Voted in Favor		Shares Withheld
Clarke H. Bailey		53,561,213		6,876,273
Donald S. Bates		53,369,975		7,067,511
Peter W. Gilson		53,368,455		7,069,031

(ii)	The proposal to approve the appointment of Ernst & Young LLP as independent auditors of the Company was approved by a vote of 59,640,934 in favor, 723,136 against and 73,416 abstaining.
(iii)	The proposal to approve an amendment to the Company’s 1996 Incentive Stock Plan to increase the number of shares of common stock authorized from 9,650,000 to 12,650,000 was approved by a vote of 19,527,590 in favor, 10,690,398 against and 1,241,976 abstaining.

ITEM 6. EXHIBITS

The exhibits required to be filed as a part of this quarterly report on Form 10-Q are listed in the accompanying Exhibit Index which is hereby incorporated by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Glenayre Technologies, Inc.
	(Registrant)
	/s/ Debra Ziola
	Debra Ziola
	Executive Vice President and Chief Financial Officer
Date: August 9, 2006	(Principal Financial Officer)

42

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

EXHIBIT INDEX

Exhibit
Number	Description
3.1	Composite Certificate of Incorporation of Glenayre reflecting the Certificate of Amendment filed December 8, 1995 was filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995 and is incorporated herein by reference.
3.2	Restated by-laws of Glenayre effective June 7, 1990, as amended September 21, 1994 was filed as Exhibit 3.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference.
10.1	The second Amendment to the Credit Agreement dated May 20, 2006 by and among Entertainment Distribution Company, LLC and Wachovia Bank, National Association was filed June 22, 2006 as Exhibit 10.1 to the Registrants’ current report on Form 8-K and is incorporated herein by reference.
10.2	Glenayre 1996 Incentive Stock Plan, as amended effective May 23, 2006.
10.3	Share Purchase Agreement dated July 21, 2006, by and among DGMS Blackburn Holdings Limited, EDC UK Holdings Limited, Entertainment Distribution Company, LLC, Glenayre Electronics, Inc. and Rank Leisure Holdings Limited.
15.1	Letter regarding unaudited financial information.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a – 14(a)/15d – 14(a), Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a – 14(a)/15d – 14(a), Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

43

EX-10.2

                                                                    EXHIBIT 10.2

                       GLENAYRE 1996 INCENTIVE STOCK PLAN


                                                                               .
                                                                               .
                                                                               .

CONTENTS



                                                                            PAGE
                                                                            ----
                                                                         
Article 1.   Establishment, Purpose and Duration                              1

Article 2.   Definitions                                                      1

Article 3.   Administration                                                   5

Article 4.   Shares Subject to the Plan                                       5

Article 5.   Eligibility and Participation                                    6

Article 6.   Stock Options                                                    6

Article 7.   Stock Appreciation Rights                                        8

Article 8.   Restricted Stock                                                10

Article 9.   Performance Shares                                              11

Article 10.  Performance Measures                                            12

Article 11.  Beneficiary Designation                                         12

Article 12.  Deferrals                                                       12

Article 13.  Rights of Key Persons                                           12

Article 14.  Change in Control                                               13

Article 15.  Awards to Non-Officer Directors                                 15

Article 15A. Restricted Stock Unit Awards to Non-Officer Directors           16

Article 16.  Amendment, Modification and Termination                         18

Article 17.  Withholding                                                     19

Article 18.  Indemnification                                                 19

Article 19.  Successors                                                      19

Article 20.  Legal Construction                                              19



GLENAYRE 1996 INCENTIVE STOCK PLAN

ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION

     1.1 ESTABLISHMENT OF THE PLAN. Glenayre Technologies, Inc. hereby
establishes an incentive compensation plan to be known as the "Glenayre 1996
Incentive Stock Plan" as set forth in this document. The Plan permits the grant
of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation
Rights, Restricted Stock and Performance Shares.

     Subject to approval by the Company's stockholders, the Plan shall become
effective as of May 22, 1996 (the "Effective Date") and shall remain in effect
as provided in Section 1.3 hereof. The Plan shall not become effective unless
stockholder approval is obtained.

     1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success
and enhance the value of the Company by linking the personal interests of
Participants to those of the Company's stockholders, and by providing
Participants with an incentive for outstanding performance.

     The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract and retain the services of Participants upon whose
judgment, interest and special effort the successful conduct of its operation
largely is dependent.

     1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date, as
described in Section 1.1 hereof, and shall remain in effect, subject to the
right of the Board of Directors to amend or terminate the Plan at any time
pursuant to Article 16 hereof, until all Shares subject to it shall have been
purchased or acquired according to the Plan's provisions. However, in no event
may an Award of an ISO be granted under the Plan after May 21, 2006.

ARTICLE 2. DEFINITIONS

     Whenever used in the Plan, the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word is
capitalized:

     2.1 "AWARD" means, individually and collectively, a grant under the Plan of
Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Restricted Stock, Restricted Stock Units or Performance Shares.

     2.2 "AWARD AGREEMENT" means an agreement entered into by the Company and
each Participant setting forth the terms and provisions applicable to Awards
granted under the Plan.

     2.3 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the
Company.

     2.4 "CHANGE IN CONTROL" of the Company shall have occurred when any
Acquiring Person (other than the Company, any employee benefit plan of the
Company or any person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan), alone or together with
its Affiliates and Associates, shall become the beneficial owner of 25% or more
of the shares of Common Stock of the Company then outstanding (except pursuant
to an offer for all outstanding shares of the Company's Common Stock at a price
and upon such terms and provisions as a majority of the Continuing Directors
determine to be in the best interests of the Company and its stockholders other
than the Acquiring Person or any Affiliate or Associate thereof


                                       2



on whose behalf the offer is being made), and the Continuing Directors no longer
constitute a majority of the Board. For purposes of this definition, the
following terms shall have the following meanings:

     (a)  "Acquiring Person" means any individual, firm, corporation or other
          entity who or which, together with all Affiliates and Associates,
          shall be the beneficial owner of a substantial block of the Company's
          Common Stock.

     (b)  "Affiliate" and "Associate" shall have the respective meanings
          ascribed to such terms in Rule 12b-2 as promulgated under the Exchange
          Act.

     (c)  "Continuing Director" means any individual who is a member of the
          Board, while such individual is a member of the Board, who is not an
          Acquiring Person, or an Affiliate or Associate of an Acquiring Person,
          or a representative or nominee of an Acquiring Person or of any such
          Affiliate or Associate, and was a member of the Board prior to the
          occurrence of the Change in Control; or any successor of a Continuing
          Director, while such successor is a member of the Board, and who is
          not an Acquiring Person, or an Affiliate or Associate of an Acquiring
          Person, or a representative or nominee of an Acquiring Person or of
          any such Affiliate or Associate, and is recommended or elected to
          succeed the Continuing Director by a majority of the Continuing
          Directors.

     2.5 "CODE" means the Internal Revenue Code of 1986, as amended from time to
time. References to the Code shall include the valid and binding governmental
regulations, court decisions and other regulatory and judicial authority issued
or rendered thereunder.

     2.6 "COMMITTEE" means the Compensation and Plan Administration Committee of
the Board, as specified in Article 3 herein, appointed by the Board to
administer the Plan.

     2.7 "COMMON STOCK" means the $0.02 par value common stock of the Company.

     2.8 "COMPANY" means Glenayre Technologies, Inc., a Delaware corporation,
and any successor as provided in Article 19 herein.

     2.9 "DIRECTOR" means any individual who is a member of the Board of
Directors.

     2.10 "DISABILITY," with respect to a Participant, means "disability" as
defined from time to time under any long-term disability plan of the Company or
Subsidiary with which the Participant is employed.

     2.11 "EARNINGS PER SHARE" means "earnings per common share" of the Company
determined in accordance with generally accepted accounting principles that
would be reported in the Company's Annual Report to Stockholders.

     2.12 "EFFECTIVE DATE" shall have the meaning ascribed to such term in
Section 1.1 hereof.

     2.13 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.

     2.14 "FAIR MARKET VALUE," with respect to a share of the Company's Common
Stock at a particular time, shall be that value as determined by the Committee
which shall be (i) if such Common Stock is listed on a national securities
exchange (which includes the NASDAQ Stock


                                       3



Market), on any given date, (A) the closing price of a share of Common Stock, as
reported on the consolidated transaction reporting system for such exchange for
that date, or if shares of Common Stock were not traded on such date, on the
next preceding day on which shares of Common Stock were traded, or (B) if the
Common Stock is not reported on the consolidated transaction reporting system
for such exchange, the last price at which the Common Stock shall have been sold
regular way on a national securities exchange on said date, or, if no sales
occur on said date, then on the next preceding date on which there were such
sales of Common Stock; or (ii) if the Common Stock shall not be listed on a
national securities exchange, the mean between the average high bid and low
asked prices last reported by the National Association of Securities Dealers,
Inc. for the over-the-counter market on said date or, if no bid and asked prices
are reported on said date, then on the next preceding date on which there were
such quotations; or (iii) if at any time quotations for the Common Stock shall
not be reported by the National Association of Securities Dealers, Inc. for the
over-the-counter market and the Common Stock shall not be listed on any national
securities exchange, the fair market value determined by the Committee on the
basis of available prices for such Common Stock or in such other manner as the
Committee may deem reasonable.

     2.15 "FREESTANDING SAR" means an SAR that is granted independently of any
Option.

     2.16 "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase Shares,
granted under Article 6 herein, and which is designated an Incentive Stock
Option intended to meet the requirements of Section 422 of the Code.

     2.17 "INSIDER" shall mean an individual who is, on the relevant date, an
officer, director or 10% beneficial owner of any class of the Company's equity
securities that is registered pursuant to Section 12 of the Exchange Act, all as
defined under Section 16 of the Exchange Act.

     2.18 "KEY PERSON" means an employee or officer of the Company or a
Subsidiary, in a managerial or other position, who can make important
contributions to the Company or a Subsidiary or a key person providing important
services to the Company or a Subsidiary, all as determined by the Committee in
its discretion.

     2.19 "NAMED EXECUTIVE OFFICER" means, for a calendar year, a Participant
who is one of the group of "covered employees" for such calendar year within the
meaning of Code Section 162(m) or any successor statute.

     2.20 "NET INCOME" means "net income" of the Company determined in
accordance with generally accepted accounting principles that would be reported
in the Company's Annual Report to Stockholders.

     2.21 "NET SALES" means the "net sales" of the Company determined in
accordance with generally accepted accounting principles that would be reported
in the Company's Annual Report to Stockholders.

     2.22 "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to purchase
Shares granted to Key Persons under Article 6 or to non-officer Directors under
Article 15 which is not intended to meet the requirements of Code Section 422.

     2.23 "OPTION" means an Incentive Stock Option or a Nonqualified Stock
Option.

     2.24 "OPTION PRICE" means the price at which a Share may be purchased by a
Participant upon the exercise of an Option.


                                       4



     2.25 "PARTICIPANT" means a person who has outstanding an Award granted
under the Plan.

     2.26 "PERFORMANCE-BASED EXCEPTION" means the performance-based exception
set forth in Code Section 162(m)(4)(C) from the deductibility limitations of
Code Section 162(m).

     2.27 "PERFORMANCE SHARE" means an AWARD granted to a Participant pursuant
to Article 9 herein.

     2.28 "PERIOD OF RESTRICTION" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the passage of time,
the achievement of performance goals, or upon the occurrence of other events as
determined by the Committee, at its discretion), and the Shares are subject to a
substantial risk of forfeiture, as provided in Article 8 herein.

     2.29 "RESTRICTED STOCK" means an Award granted to a Participant pursuant to
Article 8 herein.

     2.30 "SHARES" means shares of Common Stock of the Company.

     2.31 "STOCK APPRECIATION RIGHT" or "SAR" means an Award granted alone or in
connection with a related Option to a Participant pursuant to Article 7 herein.

     2.32 "SUBSIDIARY" means any corporation, partnership, joint venture,
affiliate or other entity in which the Company has an ownership interest, and
which the Committee designates as a participating entity in the Plan.

     2.33 "TANDEM SAR" means an SAR that is granted in connection with a related
Option, the exercise of which shall require forfeiture of the right to purchase
a Share under the related Option (and when a Share is purchased under the
Option, the Tandem SAR shall similarly be canceled).

     2.34 "TOTAL STOCKHOLDER RETURN" means the percentage change in value of an
initial investment in Shares over a specified period assuming reinvestment of
all dividends during the period.

     2.35 "EFFECTIVE AMENDMENT DATE" means the date on which the stockholders of
the Company approve the amendment to the Plan to increase the number of Shares
reserved for grants of Awards under the Plan by an additional 2,200,000 Shares.

     2.36 "SECOND EFFECTIVE AMENDMENT DATE" means that date on which the
stockholders of the Company approve the amendment to the Plan to increase the
number of Shares reserved for grants of Awards under the Plan by an additional
750,000 Shares.

     2.37 "THIRD EFFECTIVE AMENDMENT DATE" means that date on which the
stockholders of the Company approve the amendment to the Plan to increase the
number of shares reserved for grants of Awards under the Plan by an additional
2,500,000 Shares.

     2.38 "FOURTH EFFECTIVE AMENDMENT DATE" means that date on which the
stockholders of the Company approve the amendment to the Plan to increase the
number of Shares for grants of Awards under the Plan by an additional 2,000,000
Shares.


                                       5



     2.39 "RESTRICTED STOCK UNIT" OR "UNIT" means an Award granted to a
Participant pursuant to Article 15A herein.

     2.40 "FIFTH EFFECTIVE AMENDMENT DATE" means that date on which the
stockholders of the Company approve the amendment to the Plan to increase the
number of Shares for grants of Awards under the Plan by an additional 3,000,000
Shares.

ARTICLE 3. ADMINISTRATION

     3.1 THE COMMITTEE. The Plan shall be administered by the Plan
Administration Committee of the Board or by any other Committee appointed by the
Board consisting of not less than two (2) Directors. All of the members of the
Committee shall comply with the "disinterested administration" rules of Rule
16b-3 under the Exchange Act, if applicable. The members of the Committee shall
be appointed from time to time by, and shall serve at the discretion of, the
Board of Directors. In addition, any action taken with respect to Named
Executive Officers for purposes of meeting the Performance-Based Exception shall
be taken by the Committee only if all of the members of the Committee are
"outside directors" within the meaning of Code Section 162(m), subject to any
applicable transition rules under Code Section 162(m). If all of the members of
the Committee are not "outside directors," such action shall be taken by a
subcommittee of the Committee comprised of at least two members who are "outside
directors."

     3.2 AUTHORITY OF THE COMMITTEE. Except as limited by law, or by the
Certificate of Incorporation or Bylaws of the Company, and subject to the
provisions herein, the Committee shall have full power to select Key Persons who
shall participate in the Plan; determine the sizes and types of Awards;
determine the terms and provisions of Awards in a manner consistent with the
Plan; construe and interpret the Plan and any agreement or instrument entered
into under the Plan; establish, amend or waive rules and regulations for the
Plan's administration; and (subject to the provisions of Article 16 herein),
amend the terms and provisions of any outstanding Award to the extent such terms
and provisions are within the discretion of the Committee as provided in the
Plan. Further, the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan. To the extent
permitted by law, the Committee may delegate its authority hereunder.

     3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Board shall be final, conclusive and binding on all persons,
including the Company, its stockholders, employees, Participants and their
estates and beneficiaries.

ARTICLE 4. SHARES SUBJECT TO THE PLAN.

     4.1 NUMBER OF SHARES AVAILABLE FOR GRANTS. Beginning on the Effective Date,
there is hereby reserved for grants of Awards under the Plan 2,200,000 Shares.
Beginning on the Effective Amendment Date, there is hereby reserved for grants
of Awards under the Plan an additional 2,200,000 Shares. Beginning on the Second
Effective Amendment Date, there is hereby reserved for grants of Awards under
the Plan an additional 750,000 Shares, provided that the persons who are
eligible for such grants shall be limited to those persons described in Section
5.1. Beginning on the Third Effective Amendment Date, there is hereby reserved
for grants of Awards under the Plan an additional 2,500,000 Shares. Beginning on
the Fourth Effective Amendment Date, there is hereby reserved for grants of
Awards under the Plan an additional 2,000,000 Shares. Beginning on the Fifth
Effective Amendment Date, there is hereby reserved for grants of Awards


                                       6



under the Plan an additional 3,000,000 Shares. The number of Shares reserved
for grants of Awards under this paragraph shall be subject to adjustment as
provided in Section 4.3.

     In no event shall a Participant receive an Award or Awards during any one
calendar year ending prior to the Second Effective Amendment Date covering in
the aggregate more than 250,000 Shares or during any one calendar year ending on
or after the Second Effective Amendment Date covering in the aggregate more than
500,000 Shares. The limitation on awards to a Participant during a calendar year
under this paragraph shall be subject to adjustment as provided in Section 4.3.

     In no event shall the Committee grant Restricted Stock Awards under Article
8 herein or Restricted Stock Unit Awards under Article 15A herein covering in
the aggregate more than 550,000 Shares of Common Stock.

     4.2 LAPSED AWARDS. If any Award granted under the Plan is canceled,
terminates, expires or lapses for any reason (with the exception of the
termination of a Tandem SAR upon exercise of the related Option, or the
termination of a related Option upon exercise of the corresponding Tandem SAR),
any Shares subject to such Award again shall be available for the grant of an
Award under the Plan.

     4.3 ADJUSTMENTS IN AVAILABLE SHARES. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number and class of Shares which may be delivered under the
Plan, in the number and class of and/or price of Shares subject to outstanding
Awards granted under the Plan and in the limitation on awards to a Participant
during a calendar year, as may be determined to be appropriate and equitable by
the Committee, in its sole discretion, to prevent the dilution or enlargement of
rights under the Plan; provided, however, that the number of Shares subject to
any Award shall always be a whole number.

ARTICLE 5. ELIGIBILITY AND PARTICIPATION

     5.1 ELIGIBILITY. Persons eligible to participate in the Plan are Key
Persons, as determined by the Committee, and any non-officer Director who
participates in the Plan pursuant to Article 15.

     The Key Persons who are eligible for grants of Awards covering the 750,000
Shares reserved under the Plan on the Second Effective Amendment Date shall be
limited to: (i) a Chief Executive Officer of the Company hired after March 1,
1999; (ii) a Chief Financial Officer of the Company hired after March 1, 1999;
and (iii) any other senior executive of the Company or a Subsidiary (as
determined by the Committee) hired after March 1, 1999.

     5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Key Persons those to
whom Awards shall be granted and shall determine the nature and amount of each
Award. Non-officer Directors shall be granted Awards in accordance with the
provisions of Article 15.


                                       7



ARTICLE 6. STOCK OPTIONS

     6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Key Persons in such number, and upon such terms, and
at any time and from time to time as shall be determined by the Committee.

     6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains and such other provisions as the
Committee shall determine. The Award Agreement also shall specify whether the
Option is intended to be an ISO within the meaning of Section 422 of the Code,
or an NQSO whose grant is intended not to fall under Code Section 422.

     6.3 OPTION PRICE. The Committee shall determine the Option Price for each
grant of an Option under this Article 6, which such Option Price shall be set
forth in the applicable Award Agreement; provided, however, that the Option
Price shall be at least equal to 100% of the Fair Market Value of a Share on the
date the Option is granted with respect to the grant of either (i) an Option
granted to a Named Executive Officer that is intended to satisfy the
Performance-Based Exception or (ii) an ISO.

     6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the 10th anniversary date of its grant.

     6.5 EXERCISE OF OPTIONS. Options granted under this Article 6 shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve and which shall be set forth in the
applicable Award Agreement, which need not be the same for each grant or for
each Participant.

     6.6 PAYMENT. Options shall be exercised by the delivery of a written notice
of exercise to the Company, setting forth the number of Shares with respect to
which the Option is to be exercised, accompanied by full payment for the Shares.

     The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered to satisfy the Option Price must have been held by the Participant for
at least six months prior to their tender), or (c) by a combination of (a) and
(b).

     The Committee also may allow cashless exercise as permitted under the
Federal Reserve Board's Regulation G or Regulation T, subject to applicable
securities law restrictions, or by any other means which the Committee
determines to be consistent with the Plan's purpose and applicable law.

     As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).

     6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option
granted under this Article 6 as it may deem advisable, including without
limitation, restrictions under applicable Federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded and under any blue sky or state securities laws applicable
to such Shares.


                                       8



     6.8 TERMINATION OF EMPLOYMENT. Each Option Award Agreement shall set forth
the extent to which the Participant shall have the right to exercise the Option
following termination of the Participant's employment with the Company and its
Subsidiaries. Such provisions shall be determined in the sole discretion of the
Committee, shall be included in the Award Agreement entered into with the
Participant, need not be uniform among all Options issued pursuant to this
Article 6, may reflect distinctions based on the reasons for termination of
employment and may include provisions relating to the Participant's competition
with the Company after termination of employment. In that regard, if an Award
Agreement permits exercise of an Option following the death of the Participant,
the Award Agreement shall provide that such Option shall be exercisable to the
extent provided therein by any person that may be empowered to do so under the
Participant's will, or if the Participant shall fail to make a testamentary
disposition of the Option or shall have died intestate, by the Participant's
executor or other legal representative.

     6.9 NONTRANSFERABILITY of OPTIONS.

     (a)  INCENTIVE STOCK OPTIONS. No ISO granted under this Article 6 may be
          sold, transferred, pledged, assigned or otherwise alienated or
          hypothecated, other than by will or by the laws of descent and
          distribution. Further, all ISOs granted to a Participant under the
          Plan shall be exercisable during his or her lifetime only by such
          Participant.

     (b)  NONQUALIFIED STOCK OPTIONS. Except as otherwise provided in a
          Participant's Award Agreement, no NQSO granted under this Article 6
          may be sold, transferred, pledged, assigned or otherwise alienated or
          hypothecated, other than by will or by the laws of descent and
          distribution. Further, except as otherwise provided in a Participant's
          Award Agreement, all NQSOs granted to a Participant under this Article
          6 shall be exercisable during his or her lifetime only by such
          Participant.

     6.10 NO RIGHTS. A Participant granted an Option shall have no rights as a
stockholder of the Company with respect to the Shares covered by such Option
except to the extent that Shares are issued to the Participant upon the due
exercise of the Option.

ARTICLE 7. STOCK APPRECIATION RIGHTS

     7.1 GRANT OF SARS. Subject to the terms and provisions of the Plan, SARs
may be granted to Key Persons in such number, and upon such terms, and at any
time and from time to time as shall be determined by the Committee. The
Committee may grant Freestanding SARs, Tandem SARs or any combination of these
forms of SARs.

     The Committee shall have complete discretion in determining the number of
Shares covered by SARs granted hereunder (subject to Article 4 herein) and,
consistent with the provisions of the Plan, in determining the terms and
provisions pertaining to such SARs. The number of Shares covered by a
Freestanding SAR shall be counted against the number of Shares available for
grants of Awards under Section 4.1, but the number of Shares covered by a Tandem
SAR shall not be so counted.

     The grant price of a Freestanding SAR shall equal the Fair Market Value of
a Share on the date of grant of the SAR. The grant price of Tandem SARs shall
equal the Option Price of the related Option.

     7.2 EXERCISE OF TANDEM SARS. Tandem SARs may be exercised for all or part
of the Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the


                                       9



related Option. A Tandem SAR may be exercised only with respect to the Shares
for which its related Option is then exercisable.

     Notwithstanding any other provision of the Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (ii) the value
of the payout with respect to the Tandem SAR may be for no more than 100% of the
difference between the Option Price of the underlying ISO and the Fair Market
Value of the Shares subject to the underlying ISO at the time the Tandem SAR is
exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market
Value of the Shares subject to the ISO exceeds the Option Price of the ISO.

     7.3 EXERCISE OF FREESTANDING SARS. Freestanding SARs may be exercised upon
whatever terms and provisions the Committee, in its sole discretion, imposes
upon them.

     7.4 SAR AGREEMENT. Each SAR grant shall be evidenced by an Award Agreement
that shall specify the grant price, the term of the SAR and such other
provisions as the Committee shall determine.

     7.5 TERM OF SARS. The term of an SAR granted under the Plan shall be
determined by the Committee, in its sole discretion; provided, however, that
such term shall not exceed 10 years.

     7.6 PAYMENT OF SAR AMOUNT. Upon exercise of an SAR, a Participant shall be
entitled to receive payment from the Company in an amount determined by
multiplying:

     (a)  The difference between the Fair Market Value of a Share on the date of
          exercise over the grant price; by

     (b)  The number of Shares with respect to which the SAR is exercised.

     At the discretion of the Committee, the payment upon SAR exercise may be in
cash, in Shares of equivalent value or in some combination thereof; provided,
however, that from and after the date of a Change in Control, the exercise of an
SAR may be settled only in cash.

     7.7 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of the
Plan, the Committee may impose such conditions on exercise of an SAR (including
without limitation, the right of the Committee to limit the time of exercise to
specified periods) as may be required to satisfy the requirements of Section 16
(or any successor provision) of the Exchange Act.

     7.8 TERMINATION OF EMPLOYMENT. Each SAR Award Agreement shall set forth the
extent to which the Participant shall have the right to exercise the SAR
following termination of the Participant's employment with the Company and its
Subsidiaries. Such provisions shall be determined in the sole discretion of the
Committee, shall be included in the Award Agreement entered into with the
Participant, need not be uniform among all SARs issued pursuant to the Plan and
may reflect distinctions based on the reasons for termination of employment. In
that regard, if an Award Agreement permits exercise of an SAR following the
death of the Participant, the Award Agreement shall provide that such SAR shall
be exercisable to the extent provided therein by any person that may be
empowered to do so under the Participant's will, or if the Participant shall
fail to make a testamentary disposition of the SAR or shall have died intestate,
by the Participant's executor or other legal representative.


                                       10


     7.9 NONTRANSFERABILITY OF SARS. Except as otherwise provided in a
Participant's Award Agreement, no SAR granted under this Article 7 may be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, except as
otherwise provided in a Participant's Award Agreement, all SARs granted to a
Participant under the Plan shall be exercisable during his or her lifetime only
by such Participant.

     7.10 NO RIGHTS. A Participant granted an SAR shall have no rights as a
stockholder of the Company with respect to the Shares covered by such SAR except
to the extent that Shares are issued to the Participant upon the due exercise of
the SAR.

ARTICLE 8. RESTRICTED STOCK

     8.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the
Plan, Restricted Stock may be granted to Key Persons in such number, and upon
such terms, and at any time and from time to time as shall be determined by the
Committee.

     8.2 RESTRICTED STOCK AWARD AGREEMENT. Each Restricted Stock grant shall be
evidenced by a Restricted Stock Award Agreement that shall specify the Period of
Restriction, the number of Shares of Restricted Stock granted and such other
provisions as the Committee shall determine.

     8.3 TRANSFERABILITY. Except as provided in this Article 8, the Shares of
Restricted Stock granted herein may not be sold, transferred, pledged, assigned
or otherwise alienated or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the Restricted Stock
Award Agreement, or upon earlier satisfaction of any other conditions, as
specified by the Committee in its sole discretion and set forth in the
Restricted Stock Agreement. All rights with respect to the Restricted Stock
granted to a Participant under the Plan shall be available during his or her
lifetime only to such Participant.

     8.4 OTHER RESTRICTIONS. The Committee may impose such other conditions
and/or restrictions on any Shares of Restricted Stock granted pursuant to the
Plan as it may deem advisable including without limitation, a requirement that
Participants pay a stipulated purchase price for each Share of Restricted Stock,
restrictions based upon the achievement of specific performance goals
(Company-wide, divisional, and/or individual), time-based restrictions on
vesting following the attainment of the performance goals and/or restrictions
under applicable Federal or state securities laws.

     The Company shall retain the certificates representing Shares of Restricted
Stock in the Company's possession until such time as all conditions and/or
restrictions applicable to such Shares have been satisfied.

     Except as otherwise provided in this Article 8 or in the applicable Award
Agreement, Shares of Restricted Stock covered by each Restricted Stock grant
made under the Plan shall become freely transferable by the Participant after
the last day of the Period of Restriction.

     8.5 VOTING RIGHTS. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.

     8.6 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder may be
credited with regular cash dividends paid with respect to the underlying Shares
while they are so held. The Committee may apply any restrictions to the
dividends that the Committee deems appropriate.


                                       11



     In the event that any dividend constitutes a "derivative security" or an
"equity security" pursuant to Rule 16(a) under the Exchange Act, such dividend
shall be subject to a vesting period equal to the remaining vesting period of
the Shares of Restricted Stock with respect to which the dividend is paid.

     8.7 TERMINATION OF EMPLOYMENT. Each Restricted Stock Award Agreement shall
set forth the extent to which the Participant shall have the right to receive
unvested Restricted Shares following termination of the Participant's employment
with the Company and its Subsidiaries. Such provisions shall be determined in
the sole discretion of the Committee, shall be included in the Award Agreement
entered into with Participants, need not be uniform among all Shares of
Restricted Stock issued pursuant to the Plan and may reflect distinctions based
on the reasons for termination of employment; provided, however, that except in
cases of terminations resulting from a Change in Control and terminations by
reason of death or Disability, payment of an Award of Restricted Stock which is
intended to qualify for the Performance-Based Exception may not occur before
attainment of the related performance goal.

ARTICLE 9. PERFORMANCE SHARES

     9.1 GRANT OF PERFORMANCE SHARES. Subject to the terms and provisions of the
Plan, Performance Shares may be granted to eligible Key Persons in such amount
and upon such terms, and at any time and from time to time as shall be
determined by the Committee. The number and/or vesting of Performance Shares
granted, in the Committee's discretion, shall be contingent upon the degree of
attainment of specified performance goals or other conditions over a specified
period (the "Performance Period"). The terms and provisions of an Award of
Performance Shares shall be evidenced by an appropriate Award Agreement.

     9.2 VALUE OF PERFORMANCE SHARES. The value of a Performance Share at any
time shall equal the Fair Market Value of a Share at such time.

     9.3 FORM AND TIMING OF PAYMENT OF PERFORMANCE SHARES. During the course of
a Performance Period, the Committee shall determine the number of Performance
Shares as to which the Participant has earned a right to be paid pursuant to the
terms of the applicable Award Agreement. The Committee shall pay any earned
Performance Shares as soon as practicable after they are earned in the form of
cash, Shares or a combination thereof (as determined by the Committee) having an
aggregate Fair Market Value equal to the value of the earned Performance Shares
as of the date they are earned. Any Shares used to pay out earned Performance
Shares may be granted subject to any restrictions deemed appropriate by the
Committee. In addition, the Committee, in its discretion, may cancel any earned
Performance Shares and grant Stock Options to the Participant which the
Committee determines to be of equivalent value based on a conversion formula
stated in the Performance Shares Award Agreement.

     The Committee, in its discretion, may also grant dividend equivalents
rights with respect to earned but unpaid Performance Shares as evidenced by the
applicable Award Agreement. Performance Shares shall not have any voting rights.

     9.4 TERMINATION OF EMPLOYMENT. Each Performance Share Award Agreement shall
set forth the extent to which the Participant shall have the right to receive
unearned Performance Shares following termination of the Participant's
employment with the Company and its Subsidiaries. Such provisions shall be
determined in the sole discretion of the Committee, shall be included in the
Award Agreement entered into with the Participant, need not be uniform among all
Performance Shares awarded pursuant to the Plan and may reflect distinctions
based on the reasons of termination of employment; provided, however, that
except in cases of terminations resulting from a Change in


                                       12



Control and terminations by reason of death or Disability, payment of an Award
of Performance Shares which is intended to qualify for the Performance-Based
Exception may not occur before attainment of the related performance goal.

     9.5 NONTRANSFERABILITY. Except as otherwise provided in a Participant's
Award Agreement, Performance Shares may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, except as otherwise provided in a
Participant's Award Agreement, a Participant's rights under the Plan shall be
exercisable during the Participant's lifetime only by the Participant.

ARTICLE 10. PERFORMANCE MEASURES

     The performance measure(s) to be used for purposes of Awards (other than
Options) to Named Executive Officers which are designed to qualify for the
Performance-Based Exception shall be chosen from among the following
alternatives:

     (a)  Earnings Per Share;

     (b)  Net Income;

     (c)  Net Sales; or

     (d)  Total Stockholder Return.

     In the event that applicable tax and/or securities laws change to permit
Committee discretion to alter the governing performance measures without
obtaining stockholder approval of such changes, the Committee shall have the
discretion to make such changes without obtaining stockholder approval.

ARTICLE 11. BENEFICIARY DESIGNATION

     Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company and will be effective only when filed by the
Participant in writing with the Company during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.

ARTICLE 12. DEFERRALS

     The Committee may permit a Participant to defer such Participant's receipt
of the payment of cash or the delivery of Shares that would otherwise be due to
such Participant by virtue of the exercise of an Option or SAR, the lapse or
waiver of restrictions with respect to Restricted Stock or the satisfaction of
any requirements or goals with respect to Performance Shares. If any such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.

ARTICLE 13. RIGHTS OF KEY PERSONS

     13.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, nor confer upon any Participant any


                                       13



right to continue in the employ of the Company or Subsidiary. For purposes of
the Plan, a transfer of a Participant's employment between the Company and a
Subsidiary, or between Subsidiaries, shall not be deemed to be a termination of
employment.

     13.2 PARTICIPATION. No Key Person shall have the right to be selected to
receive an Award under the Plan or, having been so selected, to be selected to
receive a future Award.

ARTICLE 14. CHANGE IN CONTROL

     14.1 TREATMENT OF OUTSTANDING AWARDS. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited under applicable laws, or by
the rules and regulations of any governing governmental agencies or national
securities exchanges:

     (a)  Any and all Options and SARs granted hereunder shall become
          immediately exercisable, and shall remain exercisable throughout their
          entire term;

     (b)  Any restriction periods and restrictions imposed on shares of
          Restricted Stock shall lapse; and

     (c)  The target payout opportunities attainable under all outstanding
          Awards of Restricted Stock and Performance Shares shall be deemed to
          have been fully earned for the entire Performance Period(s) as of the
          effective date of the Change in Control, and the vesting of all Awards
          shall be accelerated as of the effective date of the Change in
          Control.

     14.2 LIMITATION ON CHANGE-IN-CONTROL BENEFITS. (a) It is the intention of
the Company and the Participants to reduce the amounts payable or distributable
to a Participant hereunder if the aggregate Net After Tax Receipts (as defined
below) to the Participant would thereby be increased, as a result of the
application of the excise tax provisions of Section 4999 of the Code.
Accordingly, anything in the Plan to the contrary notwithstanding, in the event
that the independent accountants regularly employed by the Company immediately
prior to any "change" described below (the "Accounting Firm") shall determine
that receipt of all Payments (as defined below) would subject the Participant to
tax under Section 4999 of the Code, it shall determine whether some amount of
Payments would meet the definition of a "Reduced Amount," (as defined below). If
the Accounting Firm determines that there is a Reduced Amount, the aggregate
Payments shall be reduced to such Reduced Amount in accordance with the
provisions of Section 14.2(b) below.

     For purposes of this Section 14.2(a):

          (i)  A "Payment" shall mean any payment or distribution in the nature
               of compensation to or for the benefit of a Participant who is a
               "disqualified individual" within the meaning of Section 280G(c)
               of the Code and which is contingent on a "change" described in
               Section 280G(b)(2)(A)(i) of the Code with respect to the Company,
               whether paid or payable pursuant to the Plan or otherwise;

          (ii) "Plan Payment" shall mean a Payment paid or payable pursuant to
               the Plan (disregarding this Section 14.2);

          (iii) "Net After Tax Receipt" shall mean the Present Value of a
               Payment, net of all taxes imposed on the Participant with respect
               thereto under Sections 1 and 4999 of the Code, determined by
               applying the highest marginal rate under Section 1 of the Code
               which


                                       14



               applied to the Participant's Federal taxable income for the
               immediately preceding taxable year;

          (iv) "Present Value" shall mean such value determined in accordance
               with Section 280G(d)(4) of the Code; and

          (v)  "Reduced Amount" shall mean the smallest aggregate amount of
               Payments which (A) is less than the sum of all Payments and (B)
               results in aggregate Net After Tax Receipts which are equal to or
               greater than the Net After Tax Receipts which would result if all
               Payments were paid to or for the benefit of the Participant.

     (b) If the Accounting Firm determines that aggregate Payments should be
reduced to the Reduced Amount, the Committee shall promptly give the Participant
notice to that effect and a copy of the detailed calculation thereof, and the
Participant may then elect, in the Participant's sole discretion, which and how
much of the Payments, including without limitation Plan Payments, shall be
eliminated or reduced (as long as after such election the Present Value of the
aggregate Payments is equal to the Reduced Amount), and shall advise the
Committee in writing of such election within 10 days of the Participant's
receipt of notice. If no such election is made by the Participant within such 10
day period, the Committee may elect which of the Payments, including without
limitation Plan Payments, shall be eliminated or reduced (as long as after such
election the Present Value of the aggregate Payments is equal to the Reduced
Amount) and shall notify the Participant promptly of such election. All
determinations made by the Accounting Firm under this Section 14.2 shall be
binding upon the Company and the Participant and shall be made within 60 days
immediately following the event constituting the "change" referred to above. As
promptly as practicable following such determination, the Company shall pay to
or distribute for the benefit of the Participant such Payments as are then due
to the Participant under the Plan.

     (c) At the time of the initial determination by the Accounting Firm
hereunder, it is possible that amounts will have been paid or distributed by the
Company to or for the benefit of the Participant pursuant to the Plan which
should not have been so paid or distributed ("Overpayment") or that additional
amounts which will have not been paid or distributed by the Company to or for
the benefit of the Participant pursuant to the Plan could have been so paid or
distributed ("Underpayment"), in each case, consistent with the calculation of
the Reduced Amount hereunder. In the event that the Accounting Firm, based
either upon the assertion of a deficiency by the Internal Revenue Service
against the Company or the Participant which the Accounting Firm believes has a
high probability of success or controlling precedent or other substantial
authority, determines that an Overpayment has been made, any such Overpayment
paid or distributed by the Company to or for the benefit of the Participant
shall be treated for all purposes as a loan ab initio to the Participant which
the Participant shall repay to the Company together with interest at the
applicable Federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no such loan shall be deemed to have been made and no
amount shall be payable by the Participant to the Company if and to the extent
such deemed loan and payment would not either reduce the amount on which the
Participant is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes.

     In the event that the Accounting Firm, based upon controlling precedent or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Company to or for the benefit of
the Participant together with interest at the applicable Federal rate provided
for in Section 7872(f)(2) of the Code.

     14.3 TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE-IN-CONTROL
PROVISIONS. Notwithstanding any other provision of the Plan or any Award
Agreement provision, the provisions


                                       15



of this Article 14 may not be terminated, amended or modified on or after the
date of a Change in Control to affect adversely any Award theretofore granted
under the Plan without the prior written consent of the Participant with respect
to said Participant's outstanding Awards; provided, however, the Board of
Directors, upon recommendation of the Committee, may terminate, amend or modify
this Article 14 at any time and from time to prior to the date of a Change in
Control.

ARTICLE 15. AWARDS TO NON-OFFICER DIRECTORS

     15.1 AWARDS UNDER PRIOR PLAN. Each non-officer Director on July 15, 1992
was granted an option under the Glenayre Technologies, Inc. Long-Term Incentive
Plan (the "Prior Plan") to purchase Common Stock on the later of October 30,
1992 or the date such Director completed three years of service on the Board.
Each non-officer Director elected to the Board for the first time after July 15,
1992 was granted an option under the Prior Plan to purchase Common Stock on the
third anniversary of the Director's service on the Board. Thereafter, each
non-officer Director was awarded an additional option under the Prior Plan to
purchase Common Stock on the third anniversary of the initial option award.

     15.2 AWARDS UNDER THE PLAN. (a) Between May 22, 1996 (the date the Plan was
approved by the Company's stockholders) and April 17, 1997, the provisions of
this Section 15.2(a) applied to the grant of Nonqualified Stock Options to
non-officer Directors. Each non-officer Director, who was awarded an option
under the Prior Plan to purchase Common Stock as described in Section 15.1 shall
be granted a Nonqualified Stock Option to purchase 18,000 shares of Common Stock
upon each third anniversary of the date on which such option was granted under
the Prior Plan, if he or she is then a non-officer Director. Each non-officer
Director who was not awarded an option under the Prior Plan shall be granted a
Nonqualified Stock Option to purchase 18,000 shares of Common Stock upon the
date such non-officer Director completes 3 years of service as a non-officer
Director and upon each third anniversary date thereafter, if he or she is then a
non-officer Director.

     (b) On and after April 18, 1997, the following provisions of this Section
15.2(b) shall apply to the grant of Nonqualified Stock Options to non-officer
Directors in lieu of the grant of Nonqualified Stock Options pursuant to Section
15.2(a) hereof:

          (1) Each non-officer Director, who is first elected a Director on or
          after April 18, 1997, shall be granted a Nonqualified Stock Option to
          purchase 30,000 shares of Common Stock on the date of his or her
          election as such and upon each third anniversary date thereafter, if
          he or she is then a non-officer Director.

          (2) Each non-officer Director, who first becomes a non-officer
          Director on or after April 18, 1997 and who was an officer Director
          immediately prior to becoming a non-officer Director, shall be granted
          a Nonqualified Stock Option to purchase 30,000 shares of Common Stock
          on the date he or she first becomes a non-officer Director and upon
          each third anniversary date thereafter, if he or she is then a
          non-officer Director.

          (3) Each non-officer Director, who is a non-officer Director on April
          18, 1997 and who was not granted a Nonqualified Stock Option in 1997
          pursuant to Section 15.2(b)(1) or (2) above, shall be granted a
          Nonqualified Stock Option to purchase 30,000 shares of Common Stock on
          April 18, 1997 and upon each third anniversary date thereafter, if he
          or she is then a non-officer Director.


                                       16



     (c) For purposes of this Article 15, a "non-officer Director" shall mean a
Director of the Company who is not performing services as an employee of the
Company or a Subsidiary regardless of whether such Director may hold an office
in the Company or a Subsidiary such as Chairman of the Board or Vice Chairman of
the Board.

     (d) Each Option granted under this Article 15 shall be evidenced by an
Award Agreement.

     15.3 OPTION PRICE. The Option Price for each Option granted under this
Article 15 shall be equal to the Fair Market Value of a Share on the date the
Option is granted.

     15.4 EXERCISE AND DURATION OF OPTION. Options granted under this Article 15
prior to April 18, 1997 shall be immediately exercisable. Options granted under
this Article 15 on or after April 18, 1997 shall be vested and immediately
exercisable as to one-third of the shares; an additional one-third of the shares
shall become vested and exercisable on the first anniversary of the date of
grant and the balance shall become vested and exercisable on the second
anniversary of the date of grant. A non-officer Director shall forfeit the
portion of any Option granted under this Article 15 on or after April 18, 1997
that has not become vested and exercisable prior to the date such non-officer
Director's service on the Board terminates. Vested and exercisable Options shall
remain exercisable for 10 years from the date of grant, whether or not the
Director's service on the Board continues during such period.

     15.5 PAYMENTS. Options shall be exercised by the delivery of a written
notice of exercise to the Company, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied by full payment for
the Shares.

     The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered to satisfy the Option Price must have been held by the Director for at
least six months prior to their tender), or (c) by a combination of (a) and (b).

     As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Director, in the Director's
name, Share certificates in an appropriate amount based upon the number of
Shares purchased under the Option(s).

     15.6 NONTRANSFERABILITY OF OPTIONS. No Options granted under this Article
15 may be sold, transferred, pledged, assigned or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, Options granted to a Director under this Article 15 shall be
exercisable during his or her lifetime only by such Director.

     15.7 NO RIGHTS. A Director granted an Option under this Article 15 shall
have no rights as a stockholder of the Company with respect to the Shares
covered by such Option except to the extent that shares are issued to the
Director upon the due exercise of the Option.

     15.8 LIMITATION ON AWARDS. Notwithstanding anything to the contrary herein,
(i) no Awards shall be made pursuant to this Article 15 to a Director who is an
employee of the Company or any Subsidiary; (ii) no awards shall be made pursuant
to this Article 15 following the suspension or termination of the Plan pursuant
to Article 16; and (iii) no awards shall be made pursuant to this Article 15
unless shares of Common Stock are available therefor under Section 4.1.


                                       17



ARTICLE 15A. RESTRICTED STOCK UNIT AWARDS TO NON-OFFICER DIRECTORS

     15A.1 RESTRICTED STOCK UNIT AWARDS.

     (a) Each non-officer Director shall be granted Restricted Stock Units (with
each Unit to be equivalent to one Share of Common Stock) as follows:

          (1) Each non-officer Director who is a non-officer Director on May 20,
          2003 shall be granted Restricted Stock Units, with the number of such
          Units to equal $3,450 divided by the Fair Market Value of a Share of
          the Common Stock on the first trading day in 2003.

          (2) In connection with each Annual Meeting of the Stockholders of the
          Company, beginning with the 2003 Annual Meeting, each non-officer
          Director whose term as a non-officer Director begins on, or continues
          beyond, such Annual Meeting shall be granted Restricted Stock Units,
          with the number of such Units to equal $9,000 (or such greater dollar
          amount as the Committee shall determine from time to time) divided by
          the Fair Market Value of a Share of Common Stock on the last trading
          day immediately preceding such Annual Meeting.

          (3) Each non-officer Director who first becomes a non-officer Director
          after May 20, 2003, other than at an Annual Meeting of the
          Stockholders of the Company (e.g., by being elected to fill the
          unexpired term of another Director or becoming a non-officer Director
          after having been an officer Director) shall be granted Restricted
          Stock Units, with the number of Units to equal the Pro Rata Amount
          divided by the Fair Market Value of a Share of the Common Stock on the
          last trading day immediately prior to the date such individual becomes
          a non-officer Director. For this purpose, the "Pro Rata Amount" shall
          be an amount equal to $9,000 (or the greater dollar amount determined
          by the Committee pursuant to Section 15A.1(a)(2)) multiplied by a
          fraction, the numerator of which is the approximate number of days (as
          determined by the Committee) from the date on which the individual
          becomes a non-officer Director until the next Annual Meeting of the
          Stockholders of the Company and the denominator of which is 365.

     In determining the number of Restricted Stock Units to be granted to a
Director under this Article 15A, all fractions shall be rounded up to the next
whole number.

     (b) For purposes of this Article 15A, a "non-officer Director" shall have
the same meaning as set forth in Section 15.2(c).

     (c) Each grant of Restricted Stock Units shall be evidenced by an Award
Agreement.

     15A.2 VESTING. Restricted Stock Units granted under this Article 15A shall
be vested as to one-third of the Units on the first anniversary of the date of
grant; an additional one-third of the Units shall become vested on the second
anniversary of the date of grant; and the balance shall become vested on the
third anniversary of the date of grant. For any of the Restricted Stock Units
granted under this Article 15A that have not become vested prior to the date
such non-officer Director's service on the Board terminates, (i) if such
termination is on account of such non-officer Director's voluntary resignation
or involuntary removal, then such non-vested Units shall be forfeited, provided
that any non-vested Units granted to such non-officer Director during a prior
term as a Director (rather than the term during which the termination of service
occurs) shall not be forfeited and will continue to vest according to the
vesting schedule provided in this Section 15A.2, or (ii) if such termination is
for any other reason (including death, disability or the


                                       18



expiration of such non-officer Director's term as a Director), then such
non-vested Units shall not be forfeited and will continue to vest according to
the vesting schedule provided in this Section 15A.2.

     15A.3 ISSUANCE OF SHARES UPON VESTING. Each non-officer Director shall be
entitled to receive one Share of Common Stock for each Unit that has become
vested pursuant to Section 15A.2. Such Shares shall be issued to the non-officer
Director as soon as practicable after such vesting.

     15A.4 NONTRANSFERABILITY OF UNITS. Restricted Stock Units may not be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Any Shares of Common
Stock issued as payment of vested Restricted Stock Units are not subject to such
restrictions.

     15A.5 NO VOTING RIGHTS. Non-officer Directors holding Restricted Stock
Units granted under this Article 15A shall not be entitled to exercise any
voting rights with respect to such Units.

     15A.6 DIVIDEND EQUIVALENTS. Non-officer Directors holding Restricted Stock
Units granted under this Article 15A shall be credited with an amount equal to
the dividends that would have been paid if the Units were Shares.

     15A.7 LIMITATION ON AWARDS. Notwithstanding anything to the contrary
contained herein, (i) no Awards of Restricted Stock Units pursuant to this
Article 15A shall be made to a Director who is an employee of the Company or a
Subsidiary; (ii) no Awards of Restricted Stock Units shall be made pursuant to
this Article 15A following the suspension or termination of the Plan pursuant to
Article 16; and (iii) no Awards of Restricted Stock Units shall be made pursuant
to this Article 15A unless Shares of Common Stock are available therefor under
Section 4.1.

ARTICLE 16. AMENDMENT, MODIFICATION AND TERMINATION

     16.1 AMENDMENT, MODIFICATION, AND TERMINATION. The Board may at any time
and from time to time, alter, amend, suspend or terminate the Plan in whole or
in part; provided, however, that no amendment which requires stockholder
approval in order for the Plan to continue to comply with Rule 16b-3 under the
Exchange Act, including any successor to such Rule, shall be effective unless
such amendment shall be approved by the requisite vote of stockholders of the
Company entitled to vote thereon.

     The Committee shall not have the authority to cancel outstanding Awards and
issue substitute Awards in replacement thereof.

     In no event shall any issued and outstanding Option be repriced to a lower
Option Price at any time during the term of such Option, without the prior
affirmative vote of a majority of shares of stock of the Company present at a
stockholders meeting in person or by proxy and entitled to vote thereon. Any
amendment or repeal of this provision shall require the affirmative vote of a
majority of shares of stock of the Company present at a stockholders meeting in
person or by proxy and entitled to vote thereon.

     16.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification
of the Plan shall adversely affect in any material way any Award previously
granted under the Plan, without the written consent of the Participant holding
such Award.


                                       19



     16.3 ACCELERATION OF AWARD VESTING; WAIVER OF RESTRICTIONS. Notwithstanding
any provision of the Plan or any Award Agreement provision to the contrary, the
Committee, in its sole and exclusive discretion, shall have the power at any
time to (i) accelerate the vesting of any Award granted under the Plan,
including without limitation, acceleration to such a date that would result in
said Awards becoming immediately vested or (ii) waive any restrictions of any
Award granted under the Plan.

ARTICLE 17. WITHHOLDING

     17.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising as a result of the Plan.

     17.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock
or upon any other taxable event arising as a result of Awards granted hereunder,
Participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date as of which the tax is to be
determined equal to the minimum statutory total tax which could be imposed on
the transaction. All such elections shall be irrevocable, made in writing,
signed by the Participant, and shall be subject to any restrictions or
limitations that the Committee, in its sole discretion, deems appropriate.

ARTICLE 18. INDEMNIFICATION

     Each person who is or shall have been a member of the Committee or of the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's approval, or paid by him or her in satisfaction of any
judgment in any such action, suit, or proceeding against him or her, provided he
or she shall give the Company an opportunity, at its own expense, to handle and
defend the same before he or she undertakes to handle and defend it on his or
her own behalf. The foregoing right of indemnification shall not be exclusive of
any other rights of indemnification to which such persons may be entitled under
the Company's Certificate of Incorporation or Bylaws, as a matter of law or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.

ARTICLE 19. SUCCESSORS

     All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.


                                       20



ARTICLE 20. LEGAL CONSTRUCTION

     20.1 GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.

     20.2 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.

     20.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.

     20.4 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions
under the Plan are intended to comply with all applicable conditions or Rule
16b-3 or its successors under the Exchange Act. To the extent any provision of
the Plan or action by the Committee fails to so comply, it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the Committee.

     20.5 GOVERNING LAW. To the extent not preempted by Federal law, the Plan,
and all Award Agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of North Carolina.

This document incorporates the Plan and subsequent amendments adopted on January
20, 1997, May 21, 1998, December 18, 1998, May 25, 1999, May 11, 2000 and May
20, 2003.


                                       21

EX-10.3

                                                                    EXHIBIT 10.3

DATED                                                                       2006

(1)  DGMS BLACKBURN HOLDINGS LIMITED

(2)  EDC UK HOLDINGS LIMITED

(3)  ENTERTAINMENT DISTRIBUTION COMPANY, LLC

(4)  GLENAYRE ELECTRONICS, INC.

(5)  RANK LEISURE HOLDINGS LIMITED

DEED

FOR THE SALE AND PURCHASE OF THE ENTIRE
ISSUED SHARE CAPITAL OF DELUXE GLOBAL
MEDIA SERVICES BLACKBURN LIMITED

REF: PMT/1017497

                             (RICHARDS BUTLER LOGO)

     Richards Butler LLP Beaufort House 15 St Botolph Street London EC3A 7EE
  telephone 020 7247 6555 facsimile 020 7247 5091 email law@richardsbutler.com
                        web site www.richardsbutler.com



CONTENTS

CLAUSE

                                                                          
1  INTERPRETATION.........................................................     1
2  SALE OF THE SHARES.....................................................     9
3  CONSIDERATION..........................................................     9
4  COMPLETION.............................................................    10
5  CONSIDERATION ADJUSTMENT...............................................    12
6  POST-COMPLETION OBLIGATIONS............................................    15
7  GUARANTEES AND INDEBTEDNESS............................................    20
8  SELLER'S AND RANK'S WARRANTIES.........................................    22
9  BUYER'S, EDC'S AND GUARANTOR'S WARRANTIES..............................    25
10 COMPETITION............................................................    26
11 INSURANCE..............................................................    26
12 RESCISSION.............................................................    27
13 GUARANTEES.............................................................    27
14 NOTICES................................................................    32
15 GENERAL................................................................    34

SCHEDULE

SCHEDULE 1................................................................    38
   THE COMPANY............................................................    38
SCHEDULE 2................................................................    39
   THE REAL PROPERTY......................................................    39
SCHEDULE 3................................................................    40
   SELLER'S OBLIGATIONS ON COMPLETION.....................................    40
SCHEDULE 4................................................................    43
   COMPLETION ACCOUNTS AND CONSIDERATION ADJUSTMENT.......................    43
SCHEDULE 5................................................................    50
   THE WARRANTIES.........................................................    50
   PART 1 - GENERAL.......................................................    50
   PART 3 - THE REAL PROPERTY.............................................    70
   PART 4 - TAX...........................................................    71
   PART 5 - ENVIRONMENTAL.................................................    80
   PART 6 - INTELLECTUAL PROPERTY.........................................    81
SCHEDULE 6................................................................    88
   LIMITATIONS AND EXCLUSIONS.............................................    88
SCHEDULE 7................................................................    94
   COMPETITION............................................................    94
   PART 1 - INTERPRETATION................................................    94




                                 CONTENTS PAGE 1



                                                                          
   PART 2 - RESTRICTIONS..................................................    94
   PART 3 - EXEMPTION.....................................................    97
SCHEDULE 8................................................................    98
   PRO FORMA COMPLETION ACCOUNTS..........................................    98
SCHEDULE 9................................................................   100
   SCHEDULE OF ESTIMATED AMOUNTS..........................................   100
SCHEDULE 10...............................................................   101
   GUARANTEES.............................................................   101



AGREED FORM DOCUMENTS

AUDITOR'S RESIGNATION

DIRECTORS' AND SECRETARY RESIGNATIONS

REAL PROPERTY DEEDS LIST

TAX COVENANT

UML DEED OF NOVATION

PRE-REGISTRATION POWER OF ATTORNEY

DEED OF RELEASE AND APPOINTMENT OF GUARANTOR

SANCTUARY LETTER

TRANSITIONAL SERVICES AGREEMENT

UNIVERSAL DEED OF RELEASE

MANAGEMENT ACCOUNTS

FORM 8832

PRO FORMA COMPLETION ACCOUNTS (AS SET OUT IN SCHEDULE 8)


                                 CONTENTS PAGE 2


DEED dated _____________ 2006

BETWEEN:

(1)  DGMS BLACKBURN HOLDINGS LIMITED, a company registered in England under
     number 4459460 ('THE SELLER')

(2)  EDC UK HOLDINGS LIMITED, a company registered in England under number
     5751868 ('THE BUYER')

(3)  ENTERTAINMENT DISTRIBUTION COMPANY, LLC, a Delaware limited liability
     company with Federal ID 20-2589606 ('EDC')

(4)  GLENAYRE ELECTRONICS, INC., a Colorado corporation with Federal ID
     84-0747942 ('THE GUARANTOR')

(5)  RANK LEISURE HOLDINGS LIMITED, a company registered in England under number
     1841255 ('RANK')

1    INTERPRETATION

1.1  In this Agreement -

     'THE ACCOUNTING DATE' means 31 December 2005;

     'THE ACCOUNTS' means the audited financial statements of the Company for
     the financial year ended on the Accounting Date (including the notes
     thereto);

     'AGREEMENT' means this Deed including each of the Schedules hereto;

     'BUSINESS DAY' means a day, except a Saturday or a Sunday, on which banks
     in the City of London are open for business generally (save in the case of
     clause 14 where it means a usual working day in the place of receipt of the
     relevant notice);

     'THE BUYER'S GROUP' means the Buyer and any other undertaking (which, after
     Completion, includes the Company) which at the relevant time is its
     subsidiary


                                     PAGE 1



     undertaking or parent undertaking or a subsidiary undertaking of any such
     parent undertaking;

     'THE BUYER'S SOLICITORS' means Olswang, 90 High Holborn, London WC1V 6XX,
     England;

     'CASH' means all cash held by the Company including cash at bank and all
     petty cash;

     'COMPANIES ACT' means the Companies Act 1985;

     'THE COMPANY' means Deluxe Global Media Services Blackburn Limited,
     particulars of which are set out in Schedule 1;

     'COMPLETION' means the completion of the sale and purchase of the Share in
     accordance with the provisions of clause 4;

     'THE COMPLETION ACCOUNTS' means the balance sheet in the agreed form to be
     prepared under paragraph 2 of Schedule 4;

     'CONSIDERATION' has the meaning given in clause 3.1;

     'THE CONSIDERATION ADJUSTMENT STATEMENT' means a statement setting out -

     (A)  each of the individual items comprising 'WORKING CAPITAL' and the
          aggregate amount of the Working Capital;

     (B)  the amount of the Third Party Financial Debt;

     (C)  the amounts of the Intra Group Payables and the Intra Group
          Receivables;

     (D)  the amount of Cash as at Completion; and

     (E)  the amount of each of the adjustments to be made in accordance with
          paragraph 1 of Schedule 4;


                                     PAGE 2



     'CORPORATE USAGE' has the meaning given in the Deluxe Trade Mark Licence;

     'THE DATA ROOM' means the on-line data room made available by the Seller to
     the Buyer containing information relating to the Company;

     'THE DELUXE GROUP' means the Seller, Deluxe Media Services Limited, Deluxe
     Media Services LLC, Deluxe Global Media Services LLC, Deluxe Media Services
     SA (France), Deluxe Media Services Benelux BV, Deluxe Media Services Italia
     s.r.l., Deluxe Media Services Scandinavia AB, Deluxe Media Services SLU,
     and Deluxe Media Services SA (Portugal);

     'THE DELUXE TRADE MARK LICENCE' means the trade mark licence dated 27th
     January 2006 between Deluxe Laboratories, Inc., Deluxe Entertainment
     Services, Inc., Deluxe Digital Media Management, Inc., Deluxe Laboratories
     Limited, Deluxe UK Holdings Limited (as licensors) and Deluxe Media
     Services LLC, Deluxe Media Services Limited and Rank (as licensees);

     'THE DISCLOSURE LETTER' means a disclosure letter of the same date as this
     Agreement addressed by the Seller to the Buyer disclosing, subject at all
     times to the principles of disclosure set out in clause 8.2, inter alia, an
     agreed bundle of copies of all documents in the Data Room;

     'ENCUMBRANCE' means a mortgage, charge, pledge, lien, option, restriction,
     right of first refusal, right of pre-emption or other third party right,
     interest or claim of any kind, or any other encumbrance or security
     interest of any kind (including, without limitation, any liability imposed
     or right conferred by or under any legislation) or any other type of
     preferential arrangement (including, without limitation, a title transfer
     or retention arrangement or inter-company arrangements) having similar
     effect;

     'ENVIRONMENT' means living organisms including the ecological systems of
     which they form part and the following media (alone or in combination): air
     (including that within buildings and the air within other natural or
     man-made structures whether


                                     PAGE 3



     above or below ground); water (including water under or within land or in
     drains or sewers and coastal and inland waters); and land (including land
     under water);

     'ENVIRONMENTAL LAW' means all laws (including common law) of any relevant
     jurisdiction (including the laws of the European Community) which have as a
     purpose or effect the protection of, and/or prevention of harm or damage to
     the Environment, but excluding for the avoidance of doubt laws relating to
     worker or public health and safety and laws relating to town and country
     planning or heritage controls, and all bye-laws, codes, regulations,
     judgements, notices or demands issued, promulgated or approved thereunder
     or in connection therewith prior to or at the date of this Agreement which
     have the force of law;

     'GUARANTORS' means the Guarantor, Rank and EDC;

     'INITIAL CONSIDERATION' means the sum of L1,908,088 (one million nine
     hundred and eight thousand and eighty-eight pounds);

     'INTRA GROUP PAYABLES' means all amounts, including debt, owing by the
     Company to the Seller's Group as at the date of Completion but excluding
     any amount paid by the Company under clause 4.2 and calculated using the
     bases, policies and methodologies referred to in paragraph 3 of Schedule 4;

     'INTRA GROUP RECEIVABLES' means all amounts, including debt, owing by the
     Seller's Group to the Company as at the date of Completion and calculated
     using the bases, policies and methodologies referred to in paragraph 3 of
     Schedule 4;

     'LICENSOR' has the meaning given in the Deluxe Trade Mark Licence;

     'LOSSES' means in relation to any matter, all liabilities, losses, claims,
     costs and expenses relating to that matter;

     'MANAGEMENT ACCOUNTS' means the Company's management accounts for the
     period from 1 January 2006 to 30 June 2006 (P6 2006) in the agreed form;


                                     PAGE 4



     'MATERIAL CONTRACT' means (a) an outstanding contract or pricing agreement
     (whether in writing or otherwise) entered into by the Company pursuant to
     which the Company is reasonably likely to have to pay in excess of
     L50,000 (excluding VAT) to a supplier in the course of the next 6
     months or is reasonably likely to receive in excess of L50,000
     (excluding VAT) from a customer in the course of the next 6 months or (b)
     an outstanding contract entered into by the Company or a member of the
     Seller's Group for the licensing of the use of computer software or
     intellectual property rights by the Company;

     'POUNDS' or 'L' means pounds sterling;

     'PRODUCTS' has the meaning given in the Deluxe Trade Mark Licence;

     'THE PROPERTY AND ENVIRONMENTAL REPORTS' means the 2006 update of the
     project anchor environmental due diligence report prepared by Atkins
     Limited and dated 25th May 2006, a survey report prepared by Scott
     Associates and dated 23rd May 2006 and a budget costing for current
     dilapidations liability prepared by Scott Associates and dated 13th June
     2006 in each case relating to the Real Property;

     'THE REAL PROPERTY' means each of the properties separately described in
     Schedule 2;

     'THE SANCTUARY DEBTS' has the meaning given in clause 5.5;

     'THE SANCTUARY LETTER' means the letter from Sanctuary Records Group
     Limited in the agreed form;

     'THE SELLER'S GROUP' means the Seller and any other entity, except the
     Company, which at the relevant time is its subsidiary undertaking or parent
     undertaking or a subsidiary undertaking of any such parent undertaking;

     'THE SELLER'S SOLICITORS' means Richards Butler, Beaufort House, 15 St
     Botolph Street, London EC3A 7EE, England;

     'THE SHARES' means the 4,131,534 issued shares in the Company;


                                     PAGE 5



     'SUBSIDIARY UNDERTAKING' and 'PARENT UNDERTAKING' have the meanings given
     thereto by the Companies Act;

     'TAX COVENANT' means the tax covenant between the Buyer, the Seller, Rank
     and EDC in the agreed form (the provisions of which shall, inter alia,
     apply to limit or exclude the Seller's liability under the Tax Warranties);

     'TAX WARRANTIES' means the warranties of the Seller relating to Tax given
     under clause 8.1 which are contained in Part 4 of Schedule 5;

     'TAX' has the meaning given in the Tax Covenant;

     'THIRD PARTY FINANCIAL DEBT' means all indebtedness of the Company in the
     nature of borrowings, hire purchase and finance (but not operating) lease
     obligations owing by the Company to persons other than members of the
     Seller's Group but excluding any indebtedness or any other liability
     included in the Working Capital;

     'THE TSA' means the transitional services agreement between the Company,
     the Seller, EDC and Rank in the agreed form;

     'THE WARRANTIES' means the warranties given by the Seller under clause 8.1
     which are contained in Schedule 5;

     'WARRANTY CLAIM' means a claim for any breach of any of the Warranties; and

     'THE WORKING CAPITAL' means the aggregate of the amounts determined by
     reference to the items listed in column (2) of Schedule 8 which are set
     opposite a 'Yes' in column (3) of Schedule 8 to be calculated in accordance
     with the bases, policies and methodologies referred to in paragraph 3 of
     Schedule 4 and adjusted to exclude all Intra Group Payables, Intra Group
     Receivables, Third Party Financial Debt and liability for corporation tax.


                                     PAGE 6



1.2  In this Agreement -

     (A)  a reference to a statute or statutory provision is a reference to that
          statute or provision as amended, re-enacted, replaced or modified at
          the relevant time on or prior to the date of this Agreement;

     (B)  a reference to a document 'IN THE AGREED FORM' is a reference to the
          form of that document signed or initialled for identification purposes
          by or on behalf of the parties to this Agreement;

     (C)  where any statement is qualified by the expression 'so far as the
          Seller is aware' or 'to the best of the Seller's knowledge and
          belief', or any similar or cognate expression, that statement shall be
          construed as a reference only to the state of the actual knowledge at
          the date of this Agreement of the following individuals having given
          the matter careful consideration:

          (I)  except in respect of the Warranties in Parts 2 (Pensions) and 4
               (Tax) of Schedule 5: Hamish Platt, Derek Johnson, Philip
               Whitchelo, Andrew Dixon, Greg van Howe, Larry Lawton, Andrew
               Lloyd Jones and Ian Clark;

          (II) in respect of the Warranties in Part 2 (Pensions) of Schedule 5:
               David Brennan; and

          (III) in respect of the Warranties in Part 4 (Tax) of Schedule 5:
               Clare Marku;

     (D)  a reference to 'WRITING', or any cognate expression, is a reference to
          any mode of representing or reproducing words in a visible,
          non-transitory form (including fax but excluding email);

     (E)  a reference to a clause or a Schedule is a reference to a clause of or
          a Schedule to this Agreement; a reference to a paragraph (unless
          otherwise stated) is a reference to a paragraph of the Schedule in
          which the reference


                                     PAGE 7



          appears; and a reference to this Agreement includes a reference to
          each Schedule;

     (F)  a reference to any English legal or accounting term, process, concept,
          matter or thing ('ENGLISH LAW CONCEPT') shall, in respect of any
          jurisdiction other than England and Wales where there is a term,
          process, concept, matter or thing which reasonably corresponds in that
          jurisdiction to such English law concept, be deemed to include
          references to the term, process, concept, matter or thing which so
          reasonably corresponds to such English law concept in that
          jurisdiction;

     (G)  any phrase introduced by the terms 'INCLUDING' or 'IN PARTICULAR', or
          any cognate expression, shall be construed as illustrative and not
          limiting of any preceding words;

     (H)  the eiusdem generis rule of construction shall not apply to this
          Agreement;

     (I)  a reference to 'PARTY' or 'PARTIES' is a reference to a party or the
          parties to this Agreement; and

     (J)  a reference to 'persons' includes individuals, firms, partnerships,
          companies, corporations, associations, organisations, governments,
          states, foundations and trusts (in each case whether or not having
          separate legal personality).

1.3  The headings in this Agreement are for convenience only and shall not
     affect its interpretation.

1.4  Each of the Schedules forms part of this Agreement and has effect as if set
     out in this Agreement and a reference to this Agreement includes a
     reference to all of the Schedules.


                                     PAGE 8



2    SALE OF THE SHARES

2.1  At Completion the Seller shall sell, and the Buyer shall buy, the Shares
     free from all Encumbrances, subject to the terms and conditions of this
     Agreement. The Shares shall be sold with all rights attaching to them at
     Completion, or subsequently, including the rights to receive all dividends
     and other distributions declared, paid or made at or after Completion.

2.2  The Seller covenants that it has the right to sell the Shares on the terms
     of this Agreement.

3    CONSIDERATION

3.1  The total consideration for the sale of the Shares shall be a sum equal to
     the Initial Consideration adjusted in accordance with the provisions of
     Schedule 4 (the 'CONSIDERATION') provided always that, and notwithstanding
     any other provision of this Agreement or the Tax Covenant to the contrary -

     (A)  no account shall be taken in the Completion Accounts or the
          Consideration Adjustment Statement (including the calculation of any
          item included in the Consideration Adjustment Statement) of any
          liability of any nature of the Company to the extent that such
          liability has been the subject of any payment from the Seller to the
          Buyer under the Tax Covenant or the Warranties or otherwise under this
          Agreement; and

     (B)  the Buyer shall have no claim against the Seller under the Tax
          Covenant or the Warranties or otherwise under this Agreement in
          respect of any liability of any nature of the Company to the extent
          that such liability has been taken into account in the Consideration,
          the Completion Accounts or the Consideration Adjustment Statement
          (including the calculation of any item included in the Consideration
          Adjustment Statement).


                                     PAGE 9



3.2  Any payment made by the Seller under this Agreement (including under the
     Warranties or Schedule 4) or the Tax Covenant shall be treated as a
     reduction in the consideration for the Shares.

4    COMPLETION

4.1  The sale and purchase of the Shares shall be completed at the offices of
     the Seller's Solicitors at 9a.m. London time on the date of this Agreement.

4.2  The Seller shall on Completion do, or procure to be done, the things
     specified in Schedule 3 (in so far as they have not already been done) and
     shall pay (on behalf of the relevant member of the Seller's Group) to the
     Company L80,179 (eighty thousand one hundred and seventy-nine pounds)
     on account of the repayment of the Intra Group Receivables. In addition the
     Seller shall procure that the Company repays to the Seller's Group such
     amount of debt as is required to procure that the cleared cash balances in
     the Company's bank accounts as at Completion do not in aggregate exceed
     L500,000 (five hundred thousand pounds).

4.3  The Buyer shall on Completion -

     (A)  pay to the Seller by transfer to the Seller's Solicitors' bank account
          at Barclays Bank PLC, 1 Churchill Place, London E14 5HP (sort code 20
          00 00, account number 40743771) the Initial Consideration on account
          of the Consideration;

     (B)  pay (on behalf of the Company) to the Seller (as agent for the
          relevant members of the Seller's Group) by transfer to the Seller's
          Solicitors' bank account referred to in clause 4.3(a) L888,996
          (eight hundred and eighty-eight thousand nine hundred and ninety-six
          pounds) on account of the repayment of the Intra Group Payables;

     (C)  deliver to the Seller a counterpart Disclosure Letter duly signed by
          way of acknowledgement of receipt by the Buyer;


                                    PAGE 10



     (D)  deliver to the Seller a counterpart of the TSA duly executed by EDC
          and the Company;

     (E)  deliver to the Seller a counterpart UML Deed of Novation, in the
          agreed form duly executed as a deed by all parties thereto other than
          Deluxe Media Service, LLC;

     (F)  if the document has been approved by the landlord of Buildings E, EZ,
          F and FZ by Completion, deliver to the Seller a counterpart Deed of
          Release and Appointment of Guarantor in the agreed form duly executed
          by EDC as a deed;

     (G)  deliver to the Seller the Tax Covenant duly executed by the Buyer and
          EDC as a deed;

     (H)  deliver to the Seller a certified copy of any power of attorney under
          which this Agreement or any agreement required to be executed pursuant
          to this Agreement has been executed by any member of the Buyer's
          Group;

     (I)  deliver to the Seller a certified copy of the minutes of a meeting of
          the directors of the Buyer resolving that the Buyer should enter into
          this Agreement, and each other document to be signed by it at
          Completion, and authorising the execution of those documents by each
          person signing on behalf of the Buyer;

     (J)  deliver to the Seller a certified copy officer's certificate in
          respect of the board resolutions passed by the directors/officers of
          EDC resolving that EDC should enter into this Agreement, and in
          particular give the guarantee in clause 13.3, and each other document
          to be signed by it at Completion, and authorising the execution of
          those documents by each person signing on behalf of EDC;


                                    PAGE 11



     (K)  deliver to the Seller a certified copy officer's certificate in
          respect of the board resolutions passed by the directors/officers of
          the Guarantor resolving that the Guarantor should enter into this
          Agreement, and in particular give the guarantee in clause 13.1, and
          authorising the execution of this Agreement by each person signing on
          behalf of the Guarantor; and

     (L)  deliver to the Seller a duly executed copy of the Form 8832 in the
          agreed form.

4.4  The parties agree that the payments to be made under clauses 4.2, 4.3(a)
     and 4.3(b) may be set off against each other.

4.5  The Seller hereby confirms that the Company has made or will make a "check
     the box" election under United States Treasury Regulations Section
     307.7701-3 to be treated as a disregarded entity for United States income
     tax purposes effective before Completion, that the election will be filed
     on United States Form 8832 within 15 Business Days of Completion and a copy
     of such form will be provided to the Buyer within 2 Business Days of being
     so filed. The Buyer and EDC hereby agree to the making of such election and
     shall use all reasonable endeavours to effect the same and undertake not to
     make an election under section 338 of the Internal Revenue code of 1986, as
     amended.

5    CONSIDERATION ADJUSTMENT

5.1  The Buyer and the Seller shall take the steps set out in, and comply with
     the provisions of, Schedule 4.

5.2  On the third Business Day after the date on which the Completion Accounts
     and the Consideration Adjustment Statement have been finally agreed or
     determined in accordance with Schedule 4, either -

     (A)  the Buyer shall pay to the Seller in cash by transfer to such bank
          account as may be specified by the Seller for the purpose the amount
          (if any) by which the Consideration exceeds the Initial Consideration;
          or


                                    PAGE 12



     (B)  the Seller shall pay to the Buyer in cash by transfer to such bank
          account as may be specified by the Buyer for the purpose the amount
          (if any) by which the Consideration falls short of the Initial
          Consideration,

     subject in each case to a maximum amount of L20,000,000.

5.3  On the third Business Day after the date on which the Completion Accounts
     and the Consideration Adjustment have been finally agreed or determined in
     accordance with Schedule 4, either -

     (A)  the Buyer shall pay (on behalf of the Company) to the Seller (as agent
          for the relevant members of the Seller's Group) in cash by transfer to
          such bank account as may be specified by the Seller for the purpose
          the amount (if any) -

          (I)  by which the Intra Group Payables exceed the sum of
               L888,996; and

          (II) by which the Intra Group Receivables fall short of the sum of
               L80,179; and

     (B)  the Seller shall pay (on behalf of the relevant members of the
          Seller's Group) to the Buyer (as agent for the Company) in cash by
          transfer to such bank account as may be specified by the Buyer for the
          purpose the amount (if any) -

          (I)  by which the Intra Group Payables fall short of the sum of
               L888,996; and

          (II) by which the Intra Group Receivables exceed the sum of
               L80,179.

5.4  The parties agree that the payments to be made under clauses 5.2 and 5.3
     may be set-off against each other. The Buyer agrees (as agent for the
     Company) and the Seller agrees (as agent for the relevant members of the
     Seller's Group) that the payments to be made under clauses 4.2, 4.3(b) and
     5.3 shall, subject to adjustment in accordance with Schedule 4, constitute
     a full and sufficient discharge of all amounts owing by the


                                    PAGE 13



     Company to the Seller's Group and all amounts owing by the Seller's Group
     to the Company as at the date of Completion.

5.5  To the extent that there any trade debts due from Sanctuary Records Group
     Limited ('SANCTUARY') to the Company as included in the Completion Accounts
     ('THE SANCTUARY DEBTS'), the Seller shall, subject to the terms of clauses
     5.5 to 5.8 (inclusive), pay to the Buyer a sum equal to 50 per cent. of the
     total aggregate amount of the Sanctuary Debts ('THE MAXIMUM AMOUNT') which
     remain unpaid as at the date falling 120 days from the date of this
     Agreement ('THE LONG STOP DATE') less any amounts received from Sanctuary
     during such period (which payments (if any) from Sanctuary shall, for the
     avoidance of doubt, reduce any amount due by the Seller pursuant to this
     clause 5.5 first such that should the Company receive payment from
     Sanctuary of a sum equal to the Maximum Amount prior to the Long Stop Date
     no payment shall be due from the Seller to the Buyer pursuant to this
     clause 5.5), such sum to be paid by the Seller to the Buyer within 2
     Business Days of receipt of written notice (including reasonable evidence
     confirming the amount demanded from the Seller in accordance with this
     clause) given on or after the Long Stop Date from the Buyer setting out:
     (i) the outstanding amount due to the Company in respect of the Sanctuary
     Debts at the Long Stop Date; and (ii) the amount due from the Seller to the
     Buyer in accordance with this clause.

5.6  The Buyer shall procure that the Company shall from Completion use all
     reasonable commercial endeavours applying good commercial credit control
     practices (including exercising all rights of set-off) to collect the
     Sanctuary Debts as soon as reasonably practicable and shall provide the
     Seller with written notice on the first day of each calendar month
     following Completion of the amount of any payments made by Sanctuary in
     respect of the Sanctuary Debts until such debts have been paid in full.

5.7  In the event that the Seller is required to make a payment to the Buyer
     pursuant to clause 5.5 ('THE SANCTUARY PAYMENT') and Sanctuary at any time
     in the future pays (whether in one or more instalments) any amounts to the
     Company the Buyer shall repay to the Seller a sum equal to such amount
     within 10 Business Days of receipt of


                                    PAGE 14



     the same and shall continue to make such repayments following receipt of
     any sums from Sanctuary up to an amount equal to the Sanctuary Payment
     provided that no sums received from Sanctuary after the commencement of any
     procedure or arrangement which results in any composition or compromise
     with creditors (but not a composition or compromise solely with the Company
     or initiated whether directly or indirectly by the Buyer's Group) whether
     pursuant to a creditors voluntary arrangement or scheme of arrangement or
     otherwise (but excluding any dividend or distribution paid to creditors
     which shall for the avoidance of doubt be treated as received by the
     Company in accordance with this clause 5) shall be treated for the purposes
     of this clause 5.7 as having been received from Sanctuary.

5.8  The Buyer shall not and shall procure that the Buyer's Group shall not,
     without the prior written consent of the Seller, vary the terms of any
     contract pursuant to which the Sanctuary Debts are due to the Company in a
     manner which deprives the Company of a right under the same to collect the
     Sanctuary Debts or any of them or waive, compromise or prejudice any of
     such rights.

6    POST-COMPLETION OBLIGATIONS

6.1  Rank hereby grants to the Buyer as agent for the Company a non-exclusive,
     non-transferable, royalty-free sub-licence under Licensors' rights in the
     'Deluxe' name in England -

     (A)  during the period of 4 months after Completion for the Company to use
          the 'Deluxe' name in connection with carrying on of its business as
          carried on immediately prior to Completion (the 'Business') as follows
          -

          (I)  applying the 'Deluxe' name to products manufactured and/or
               services offered by or on behalf of the Company in the Business
               and disposing of such products or services;


                                    PAGE 15


          (II) using the 'Deluxe' name in advertisements, promotional materials,
               web sites, and other materials published by or on behalf of the
               Company in the Business;

          (III) using the 'Deluxe' name for Corporate Usage; and

     (B)  to continue to use the 'Deluxe' name to the extent reasonably
          necessary for the sale or distribution of Products that were
          manufactured or printed by or on behalf of the Company prior to the
          expiry of 4 months from Completion;

     in each case solely in connection with the carrying on of the Business by
     or on behalf of the Company and in the same manner and to the same extent
     that the 'Deluxe' name was used in the Business in the 12 months prior to
     Completion.

6.2  On expiration of the sub-licence granted in clause 6.1, the Company shall
     immediately -

     (A)  cease use of the 'Deluxe' name; and

     (B)  destroy all products, stationery, advertising and other materials
          under its control that bear the 'Deluxe' name and certify in writing
          to Rank that this has been done except in so far as continued use is
          permitted under clause 6.1(b).

6.3  The Buyer acknowledges (as agent for the Company) and agrees to procure
     that the Company's use of the 'Deluxe' name pursuant to the sub-licence in
     clause 6.1 is subject to the terms and conditions of the Deluxe Trade Mark
     Licence and the Buyer agrees to procure that any use made by the Company of
     the 'Deluxe' name after Completion shall not be inconsistent with the terms
     and conditions of the licence granted to Rank pursuant to the Deluxe Trade
     Mark Licence.

6.4  The Buyer shall procure that neither the Company nor any member of the
     Buyer's Group shall cause Rank or any member of the Seller's Group to be in
     breach or in contravention of any provision of the Deluxe Trade Mark
     Licence.


                                    PAGE 16



6.5  The Buyer acknowledges for itself and as agent for the Company and the
     members of the Buyer's Group that neither it nor any of such other
     companies shall acquire any right, title or interest in or to the 'Deluxe'
     name, or the goodwill attached to it, by virtue of this Agreement or its
     use of the 'Deluxe' name other than the rights specifically granted to it
     under clause 6.1.

6.6  The Buyer for itself and as agent for the Company and the members of the
     Buyer's Group agrees with Rank (for itself and as trustee for the benefit
     of the Licensors) that -

     (A)  the Licensors shall retain sole and exclusive ownership of the
          'Deluxe' name, and all goodwill and rights related thereto;

     (B)  all goodwill arising from use of the 'Deluxe' name by the Company at
          any time shall accrue and belong to the Licensors;

     (C)  the Buyer shall procure that the Company, at the Licensors' request
          and cost, shall promptly execute all documents required by the
          Licensors to confirm the matters in clauses 6.6(a) and (b);

     (D)  all use of the 'Deluxe' name by or on behalf of the Company shall be
          deemed to be use by the Licensors;

     (E)  the Buyer agrees to procure that the Company shall, at the request and
          cost of the Licensors, cooperate with and assist the Licensors in any
          matter reasonably necessary for retaining or enforcing the Licensors'
          rights in the 'Deluxe' name;

     (F)  The Buyer shall not and shall procure that the Company shall not
          assign, transfer or otherwise deal with all or any of its rights
          and/or obligations under clauses 6.1 to 6.6 to any person; and

     (G)  the Buyer shall, and shall procure that the Company shall, cooperate
          with and assist Rank in relation to Rank's compliance with the
          provisions of the Deluxe Trade Mark Licence such cooperation and
          performance to be at Rank's


                                    PAGE 17



          expense save to the extent that any expense arises out of or in
          connection with any breach by the Company or the Buyer's Group of the
          provisions of clauses 6.1 to 6.6 (in which case such expense shall be
          for the account of the Buyer) and subject always to the provisions of
          the indemnity in clause 6.8.

6.7  The Buyer agrees that the provisions of clauses 6.1 to 6.6 shall apply for
     the benefit of Rank for itself and as trustee for the benefit of the
     Seller's Group.

6.8  The Buyer undertakes to Rank and the Seller for themselves and as trustees
     for the benefit of each member of the Seller's Group that it shall
     indemnify Rank and each member of the Seller's Group against all Losses
     which Rank or any member of the Seller's Group may reasonably incur as a
     result of any use by the Company or any member of the Buyer's Group of the
     name 'Deluxe' or any logo incorporating the 'Deluxe' name in breach of or
     inconsistent with this clause 6.

6.9  The Buyer undertakes to the Seller for itself and as trustee for the
     benefit of each member of the Seller's Group that it shall procure that -

     (A)  the Company shall preserve until the seventh anniversary of Completion
          all books of account, employee records, financial records and records
          relating to Tax in each case which it is by law required to maintain
          and which are at Completion in its possession or under its control
          insofar as they record matters occurring on or before Completion;

     (B)  until the seventh anniversary of Completion, the Seller and its agents
          and advisers shall be allowed to inspect and take copies of the books,
          records and documents referred to in clause 6.9(a) (but only in
          relation to matters recorded therein which occurred on or before
          Completion) during normal working hours upon the Seller giving
          reasonable notice of such requirement to the Company; and

     (C)  the Company and its accounting team after Completion provide such
          information and assistance to the Seller and its agents and advisers
          as the Seller


                                    PAGE 18



          may reasonably require (in relation to specific enquiries only) to
          enable the Seller's Group to prepare interim and annual results,
          statutory accounts and returns and computations relating to Tax and to
          comply with any statutory or regulatory requirement and to respond to
          any enquiry from any authority or regulatory body.

6.10 The Seller undertakes to the Buyer for itself and as trustee for the
     benefit of the Company that it shall procure that -

     (A)  the Seller's Group shall preserve until the seventh anniversary of
          Completion all books of account, employee records, financial records
          and records relating to Tax in each case which it or the Company is by
          law required to maintain and which are after Completion in its
          possession or under its control insofar as they record matters
          occurring on or before Completion;

     (B)  until the seventh anniversary of Completion, the Company and its
          agents and advisers shall be allowed to inspect and take copies of the
          books, records and documents referred to in clause 6.10(a) (but only
          in relation to matters recorded therein which occurred on or before
          Completion) during normal working hours upon the Company giving
          reasonable notice of such requirement to the Seller; and

     (C)  the Seller and the Seller's Group's accounting team after Completion
          provide such information and assistance to EDC on behalf of the
          Buyer's Group and its agents and advisers as EDC may reasonably
          require (in relation to specific enquiries only) to enable the Buyer's
          Group to prepare interim and annual results, statutory accounts and
          returns and computations relating to Tax and to comply with any
          statutory or regulatory requirement and to respond to any enquiry from
          any authority or regulatory body.

6.11 The Seller shall procure that the Company is released from the Seller's
     Group's bank account pooling arrangements with effect from Completion.


                                    PAGE 19



6.12 The Seller and Rank agree to use reasonable endeavours to procure that -

     (A)  the existing terms and conditions under which: (i) employees of the
          Company are provided as at Completion with Company mobile phones
          pursuant to a central Seller's Group contract are maintained until the
          earlier of the date on which such phones are migrated to an agreement
          with a member of the Buyer's Group and one month from Completion; and
          (ii) any water, gas, electricity or other utilities are provided as at
          Completion to the Company pursuant to a central Seller's Group
          contract are maintained until 30 September 2006; and (iii) any PHI
          cover is provided as at Completion to the Company's employees pursuant
          to a central Seller's Group contract is maintained until the date
          falling two months after Completion; and

     (B)  any services, facilities or equipment (other than the mobile phone,
          utility and PHI services mentioned above) provided to the Company at
          Completion by any third party pursuant to the terms of a contract
          between a member of the Seller's Group and a third party shall
          continue to be provided to the Company in the same manner and on the
          same terms for a period of 4 months after Completion subject to the
          relevant member of the Seller's Group or the third party (as
          applicable) being promptly (and in any event within two Business Days
          of receipt a relevant invoice) reimbursed by the Buyer's Group for
          actual costs incurred by it in providing such services, facilities or
          equipment.

6.13 The Seller undertakes that it will or will procure that the relevant member
     of the Seller's Group will, at the Buyer's request and cost, take all
     reasonable steps to enforce the terms of any confidentiality agreement
     entered into with any previous potential purchaser of the Company in the
     two years prior to the date of this Agreement in order to protect the
     goodwill of the Company.

7    GUARANTEES AND INDEBTEDNESS

7.1  The Seller and Rank jointly and severally undertake to the Buyer as trustee
     for the benefit of the Company that they shall use all reasonable
     endeavours to ensure that


                                    PAGE 20



     promptly after Completion the Company is released with effect from
     Completion from all subsisting guarantees, security interests and
     indemnities given by it in relation to the obligations of the Seller or any
     member of the Seller's Group and, pending that release, the Seller and Rank
     shall jointly and severally indemnify the Buyer as trustee for the benefit
     of the Company on demand against all Losses suffered by the Company arising
     under those guarantees, security interests and indemnities on or after
     Completion in relation to the obligations of the Seller's Group (excluding
     the Company).

7.2  The Buyer and EDC jointly and severally undertake to the Seller (for itself
     and as trustee for the members of the Seller's Group) that they shall use
     all reasonable endeavours to ensure that promptly after Completion the
     Seller's Group is released with effect from Completion from all subsisting
     guarantees, security interests and indemnities given by the Seller's Group
     in relation to the obligations of the Company and which are listed in
     Schedule 10 or of which the Buyer's Group becomes aware after Completion
     and, pending that release, the Buyer and EDC shall jointly and severally
     indemnify the Seller for itself and as trustee of the Seller's Group on
     demand against all Losses suffered by the Seller's Group arising under
     those guarantees, security interests and indemnities on or after Completion
     in relation to the obligations of the Company (provided always that for the
     purposes of this clause 7.2 the phrase "all reasonable endeavours" shall
     not oblige EDC or the Buyer to create any guarantee, security interest or
     indemnity that would create any additional balance sheet or off balance
     sheet liability for EDC or be treated as indebtedness or violate any
     covenant under the Buyer's Group's credit agreements existing at the date
     hereof).

7.3  Without prejudice to clause 7.2, the Seller has prior to the date of this
     Agreement applied to the landlord ('THE LANDLORD') of the lease under which
     the Company holds that part of the Real Property shortly known as Buildings
     E, EZ, F and FZ Philips Works for the release of Deluxe Media Service, LLC
     as, and for the substitution of EDC, as guarantor of the tenant covenants
     under such lease ('THE APPLICATION'). If the Application has not been
     granted by Completion EDC agrees promptly to satisfy the lawful and
     reasonable requirements of the Landlord and to use all reasonable


                                    PAGE 21



     endeavours to assist the Seller in connection with the Application
     including (without limitation) providing to the Seller all information,
     references and documents as shall be reasonably requested by the Landlord
     to support the Application, to the intent that EDC will use all reasonable
     endeavours to ensure that the Deed of Release and Appointment of Guarantor
     in the agreed form (subject to such amendments as the Landlord may
     reasonably require save that such amendments shall not be reasonable if
     they include any amendment to the terms of the lease) is completed as a
     soon as reasonably possible following Completion.

8    SELLER'S AND RANK'S WARRANTIES

8.1  The Seller warrants to the Buyer at the date of this Agreement in the terms
     contained in Schedule 5 subject to the matters disclosed in or by the
     Disclosure Letter and the provisions of this Agreement including in
     particular the provisions of Schedule 6 (and each of the parties
     acknowledges that the terms of those Schedules and this clause 8 are in the
     circumstances fair and reasonable) and provided always that (and
     notwithstanding any provision of this Agreement to the contrary) the Seller
     shall have no liability under the Warranties relating to or arising out of
     or in connection with (a) the state and/or condition of the Real Property,
     any liability to any landlord in respect of the same (including in respect
     of dilapidations or alterations) or any matter referred to in the Property
     and Environmental Reports or (b) without prejudice to (a), matters relating
     to the Environment and/or Environmental Law except under the Warranties
     contained in Part 5 of Schedule 5.

8.2  A matter shall be regarded as disclosed in or by the Disclosure Letter for
     the purposes of this clause 8 (and the Seller shall have no liability in
     respect of that matter under the Warranties) only to the extent that
     information about that matter is fairly disclosed in or by the Disclosure
     Letter in reasonably sufficient detail to identify the nature and scope of
     that matter.

8.3  Each of the Warranties is separate and is to be construed independently of
     the other Warranties.


                                    PAGE 22



8.4  No matter within the imputed or constructive knowledge of the Buyer on the
     date of this Agreement, but excluding all matters regarded as disclosed in
     accordance with clause 8.2, shall be regarded as qualifying the Warranties,
     so that neither the Buyer's right to make a Warranty Claim nor the quantum
     of any such claim made shall be affected by any such imputed or
     constructive knowledge. The Buyer and EDC warrant to the Seller that they
     are not at the date of this Agreement actually aware of any matter, other
     than all matters regarded as disclosed in accordance with clause 8.2, which
     would constitute a breach of any of the Warranties and which would entitle
     the Buyer to make a Warranty Claim. For the purposes of this clause 8.4 the
     actual knowledge of the Buyer and EDC shall be the actual knowledge of
     Clarke Bailey, Matthew Behrent and Roger Morgan.

8.5  The Buyer acknowledges and agrees that in entering into this Agreement it
     has relied only on the provisions of this Agreement, including, for the
     avoidance of doubt, the Warranties, and the Tax Covenant, and all other
     documents referred to therein, and that it shall have no right or remedy in
     respect of any representation, warranty, promise or assurance (made by any
     person whether or not a party to this Agreement) which is not included in
     this Agreement or the Tax Covenant other than a fraudulent representation,
     warranty, promise or assurance.

8.6  The Seller unconditionally and irrevocably waives any rights it may have
     against (and undertakes not to make any claims against or pursue any action
     to join in as third party or seek a contribution or indemnity from) the
     Company in connection with preparing the Disclosure Letter or agreeing any
     terms of this Agreement and save in the case of any dishonesty, fraud or
     deliberate concealment, the Seller unconditionally and irrevocably waives
     any rights it may have against (and undertakes not to make any claims
     against or pursue any action to join in as a third party or seek a
     contribution or indemnity from) any director or employee of the Company on
     whom the Seller has or may have relied, in connection with preparing the
     Disclosure Letter or agreeing to any terms of this Agreement. The Seller
     agrees that the benefit of this clause is held by the Company for itself
     and as trustee for the benefit of the Buyer's Group and any present or
     former employee, director, agent or officer of the Company.


                                    PAGE 23



8.7  The Buyer acknowledges and agrees that the only remedy available to it for
     breach of the Warranties (excluding the Tax Warranties in respect of which
     the provisions of the Tax Covenant shall apply), or for misrepresentation
     where the representation has become a Warranty, shall, subject to the
     provisions of Schedule 6, be damages.

8.8  The Buyer agrees that it has no rights against any member of the Seller's
     Group (other than the Seller and Rank under this Agreement or the Tax
     Covenant) or any present or former employee, director, agent or officer of
     the Company or of any member of the Seller's Group in connection with this
     Agreement, the Tax Covenant or their subject matter (and to the extent that
     the Buyer has any such rights, the Buyer hereby waives such rights) and the
     Buyer undertakes that it shall not make any claim against any member of the
     Seller's Group (other than the Seller or Rank under this Agreement or the
     Tax Covenant) or any present or former employee, director, agent or officer
     of the Company or of any member of the Seller's Group in connection with
     this Agreement, the Tax Covenant or their subject matter, provided that
     nothing in this clause shall operate to prevent the Buyer from enforcing
     rights or making a claim against any person to the extent that those rights
     are available or that claim arises in respect of that person's own fraud,
     dishonesty or wilful concealment. The Buyer agrees that the benefit of this
     clause is held by the Seller for itself and as trustee for the benefit of
     the Seller's Group and any present or former employee, director, agent or
     officer of the Company or of any member of the Seller's Group.

8.9  The Seller warrants to the Buyer as follows -

     (A)  it has the requisite power and authority to enter into and perform
          this Agreement and any other agreement referred to in this Agreement
          to which it is or has agreed to become a party ('the Seller
          Documents');

     (B)  this Agreement constitutes and the Seller Documents will, when
          executed, constitute binding obligations of the Seller in accordance
          with their respective terms; and


                                    PAGE 24



     (C)  it has obtained all necessary shareholder and board approvals (or
          foreign equivalents) in respect of this Agreement and the Seller
          Documents.

8.10 Rank warrants to the Buyer as follows -

     (A)  it has the requisite power and authority to enter into and perform
          this Agreement and any other agreement referred to in this Agreement
          to which it is or has agreed to become a party ('the Rank Documents');

     (B)  this Agreement constitutes and the Rank Documents will, when executed,
          constitute binding obligations of Rank in accordance with their
          respective terms; and

     (C)  it has obtained all necessary shareholder and board approvals (or
          foreign equivalents) in respect of this Agreement and the Rank
          Documents.

9    BUYER'S, EDC'S AND GUARANTOR'S WARRANTIES

9.1  Each of the Buyer and EDC warrants to the Seller as follows -

     (A)  it has the requisite power and authority to enter into and perform
          this Agreement and any other agreement referred to in this Agreement
          to which it is or has agreed to become a party ('the Buyer
          Documents');

     (B)  this Agreement constitutes and the Buyer Documents will, when
          executed, constitute binding obligations of the Buyer and EDC, as
          applicable, in accordance with their respective terms;

     (C)  it has obtained all necessary shareholder and board approvals (or
          foreign equivalents) in respect of this Agreement and the Buyer
          Documents; and

     (D)  it is not aware of any matter which constitutes, or would constitute,
          a breach of the Warranties.


                                    PAGE 25



9.2  The Guarantor warrants to the Seller as follows -

     (A)  it has the requisite power and authority to enter into and perform
          this Agreement and any other agreement referred to in this Agreement
          to which it is or has agreed to become a party ('the Guarantor
          Documents');

     (B)  this Agreement constitutes and the Guarantor Documents will, when
          executed, constitute binding obligations of the Guarantor in
          accordance with their respective terms; and

     (C)  it has obtained all necessary shareholder and board approvals (or
          foreign equivalents) in respect of this Agreement and the Guarantor
          Documents.

10   COMPETITION

     In consideration of the purchase of the Share the Seller undertakes with
     the Buyer that it will, and will procure that every member at the relevant
     time of the Seller's Group will, comply with the provisions of Schedule 7.

11   INSURANCE

11.1 The Buyer acknowledges and agrees that the insurance broker services
     agreement and all insurance effected by the Seller's Group for the benefit
     of the Company will cease to have effect upon the Company ceasing to be a
     subsidiary undertaking of the Seller on Completion and accordingly that it
     is the responsibility of the Buyer to effect new insurance for the benefit
     of the Company with effect from that date.

11.2 In respect of any outstanding insurance claim notified under the insurances
     effected by the Seller's Group for the benefit of the Company by or on
     behalf of the Company prior to Completion or in respect of any occurrence
     prior to Completion required to be notified after Completion under such
     insurances, the Buyer shall procure that the Company shall deal exclusively
     with the Seller's Group's nominated insurance manager in respect of all
     matters relating to such claim or occurrence and the Seller


                                    PAGE 26



     shall procure that any amount received from the Seller's Group's insurers
     after Completion in respect of such claim or occurrence is paid promptly to
     the Company.

11.3 Nothing in this clause is intended to affect in any way or otherwise apply
     to insurances for the benefit of the Company effected by the landlord of
     any property occupied by the Company.

12   RESCISSION

     No party shall have any right whether before or after Completion to rescind
     or terminate this Agreement except where such right is available in respect
     of fraud.

13   GUARANTEES

13.1 The Guarantor irrevocably and unconditionally -

     (A)  guarantees to the Seller to ensure the Buyer's full and prompt payment
          of the Initial Consideration within the time limit prescribed by this
          Agreement;

     (B)  undertakes with the Seller that if the Buyer does not pay any such
          amount when due under or in connection with this Agreement, the
          Guarantor shall immediately on demand pay that amount as if it were
          the principal obligor; and

     (C)  agrees to indemnify the Seller on demand against all Losses which the
          Seller may incur in enforcing any rights under this guarantee against
          the Guarantor.

13.2 Rank irrevocably and unconditionally -

     (A)  guarantees to the Buyer and EDC the performance by the Seller of all
          the Seller's obligations under this Agreement within any time limit
          prescribed by this Agreement;

     (B)  undertakes with the Buyer and EDC that whenever the Seller does not
          pay any amount or perform any obligation when due under or in
          connection with this Agreement, Rank shall immediately on demand pay
          that amount or perform or


                                    PAGE 27



          procure the performance of that obligation as if it were the principal
          obligor; and

     (C)  agrees to indemnify the Buyer and EDC on demand against all Losses
          which the Buyer or EDC may incur in enforcing any rights under this
          guarantee against Rank.

13.3 EDC irrevocably and unconditionally -

     (A)  guarantees to the Seller and Rank the performance by the Buyer of all
          the Buyer's obligations under this Agreement within any time limit
          prescribed by this Agreement;

     (B)  undertakes with the Seller and Rank that whenever the Buyer does not
          pay any amount or perform any obligation when due under or in
          connection with this Agreement, EDC shall immediately on demand pay
          that amount or perform or procure the performance of that obligation
          as if it were the principal obligor; and

     (C)  agrees to indemnify the Seller and Rank on demand against all Losses
          which the Seller or Rank may incur in enforcing any rights under this
          guarantee against the EDC.

13.4 The liability of the Guarantors under clauses 13.1 and 13.2 shall not be
     released or diminished in whole or in part by anything which, but for this
     provision, might operate to affect their liability, including without
     limitation -

     (A)  any variation of the terms of this Agreement;

     (B)  any forbearance or neglect or delay in seeking the performance of any
          obligations under this Agreement or any granting of time for the
          performance of those obligations or any other arrangements between the
          Buyer and the Seller or any other person; or


                                    PAGE 28



     (C)  any unenforceability or invalidity of any obligation of the Seller or
          the Buyer, so that this clause shall be construed as if there were no
          such unenforceability or invalidity.

13.5 So long as the Seller remains under any actual or contingent obligation
     under this Agreement, Rank shall not exercise any rights which it may at
     any time have by reason of the performance of its obligations under this
     clause to be indemnified by the Seller, to claim a contribution from
     another surety of the Seller's obligations or to take the benefit (by way
     of subrogation or otherwise) of any of the Seller's rights under this
     Agreement.

13.6 Rank will not hold any security from the Seller in respect of the guarantee
     in clause 13.2, and any such security which is held in breach of this
     clause shall be held by Rank on trust for the Buyer.

13.7 So long as the Buyer remains under any actual or contingent obligation
     under this Agreement to pay any amount referred to in clause 13.1(a), the
     Guarantor shall not exercise any rights which it may at any time have by
     reason of the performance of its obligations under this clause 13 to be
     indemnified by the Buyer, to claim a contribution from another surety of
     the Buyer's obligations or to take the benefit (by way of subrogation or
     otherwise) of any of the Buyer's rights under this Agreement.

13.8 The Guarantor will not hold any security from the Buyer in respect of the
     guarantee in clause 13.1, and any such security which is held in breach of
     this clause shall be held by the Guarantor on trust for the Seller.

13.9 So long as the Buyer remains under any actual or contingent obligation
     under this Agreement, EDC shall not exercise any rights which it may at any
     time have by reason of the performance of its obligations under this clause
     to be indemnified by the Buyer, to claim a contribution from another surety
     of the Buyer's obligations or to take the benefit (by way of subrogation or
     otherwise) of any of the Buyer's rights under this Agreement.


                                    PAGE 29



13.10 EDC will not hold any security from the Buyer in respect of the guarantee
     in clause 13.3, and any such security which is held in breach of this
     clause shall be held by EDC on trust for the Seller and Rank.

13.11 Rank warrants and represents to the Buyer and the Guarantor warrants and
     represents to the Seller and EDC warrants and represents to the Seller that
     it is not engaged in any litigation, arbitration, mediation, conciliation,
     expert determination, adjudication or other dispute resolution process as
     claimant or defendant, which might have an effect upon its capacity to
     perform its obligations under this Agreement and no such dispute resolution
     process has been threatened against it.

13.12 Rank further warrants and represents to the Buyer and the Guarantor
     warrants and represents to the Seller and EDC warrants and represents to
     the Seller that the entering into and performance by Rank or the Guarantor
     or EDC (as the case may be) of its obligations under this Agreement -

     (A)  will not result in a breach of any provision of its memorandum or
          articles of association (or foreign equivalent);

     (B)  will not result in a breach of, or constitute a default under, any
          agreement under which it enjoys rights or by which it is bound;

     (C)  will not result in a breach of any order, judgment or decree of any
          court or governmental, administrative or regulatory body or agency to
          which it is party or by which it is bound; and

     (D)  does not require the consent of any third party which consent has not
          been obtained.

13.13 The guarantees contained in clauses 13.1, 13.2 and 13.3 are continuing
     guarantees and shall remain in force until -


                                    PAGE 30



     (A)  in the case of the guarantee set out in clause 13.1, the amounts
          referred to in clause 13.1 have been paid in full to the Seller
          regardless of any intermediate payment or discharge in whole or in
          part;

     (B)  in the case of the guarantee set out in clause 13.2, the expiry of the
          time limit in paragraph 3(a) of Schedule 6 (or, in respect of the
          Seller's obligations under any Claim (as defined in Schedule 6) which
          has been notified to the Seller in accordance with Schedule 6 and
          which remains outstanding at the expiry of such time limit, the
          settlement of such obligations); and

     (C)  in the case of the guarantee set out in clause 13.3, the expiry of the
          time limit in paragraph 3(a) of Schedule 6 (or, if later, the
          settlement of the Buyer's obligations under any claim against it under
          this Agreement which has been notified to it without any unreasonable
          delay and which remains outstanding at the expiry of such time limit).

13.14 If any monies paid to the Buyer by the Seller, or to the Seller by the
     Buyer, or to Rank by the Buyer under this Agreement have to be repaid by
     either the Buyer, the Seller or Rank by virtue of any provision or
     enactment relating to bankruptcy, insolvency or liquidation (including any
     foreign equivalents) for the time being in force or on any other ground,
     the liability of each of the Guarantor, Rank and EDC shall be computed as
     if those monies had never been paid to the Buyer, the Seller or Rank at
     all.

13.15 The Guarantors waive any right they may have of first requiring the Seller
     (in the case of the Guarantor and EDC) or the Buyer (in the case of Rank)
     to proceed against or enforce any other rights or security or claim payment
     from any person before claiming from the Guarantors under this clause 13.

13.16 Until all amounts which may be or become payable by the Buyer, the
     Guarantor or EDC under or in connection with this Agreement have been
     irrevocably paid in full, the Seller may -


                                    PAGE 31


     (A)  refrain from applying or enforcing any other moneys, security or
          rights held or received by the Seller in respect of those amounts, or
          apply and enforce the same in such manner and order as it sees fit
          (whether against those amounts or otherwise) and neither the Guarantor
          or EDC shall be entitled to the benefit of the same; and

     (B)  hold in an interest-bearing suspense account any moneys received from
          the Guarantor or EDC or on account of the Guarantor's or EDC's
          liability under this clause.

13.17 Until all amounts which may be or become payable by the Seller or Rank
     under or in connection with this Agreement have been irrevocably paid in
     full, the Buyer may -

     (A)  refrain from applying or enforcing any other moneys, security or
          rights held or received by the Buyer in respect of those amounts, or
          apply and enforce the same in such manner and order as it sees fit
          (whether against those amounts or otherwise) and Rank shall not be
          entitled to the benefit of the same; and

     (B)  hold in an interest-bearing suspense account any moneys received from
          Rank or on account of Rank's liability under this clause.

14   NOTICES

14.1 Any notice or other communication to be given or served under or in
     connection with this Agreement must be in writing and must be -

     (A)  delivered by hand; or

     (B)  sent by ordinary first class (or airmail in the case of notices to or
          from any country outside the United Kingdom), special delivery or
          recorded delivery post (in each case, pre-paid).

     to the party due to receive the notice at the following address -


                                    PAGE 32



          (I)  in the case of the Seller, at its registered office from time to
               time, marked for the attention of the Company Secretary;

          (II) in the case of the Buyer, at 825 8th Avenue, 23rd Floor, New
               York, N.Y. 10019, USA, marked for the attention of the Chief
               Financial Officer;

          (III) in the case of the Guarantor, at 825 8th Avenue, 23rd Floor, New
               York, N.Y. 10019, USA, marked for the attention of the Chief
               Financial Officer;

          (IV) in the case of Rank, at its registered office from time to time,
               marked for the attention of the Company Secretary; and

          (V)  in the case of EDC, at 825 8th Avenue, 23rd Floor, New York, N.Y.
               10019, USA, marked for the attention of the Chief Financial
               Officer;

     or at such other address as may previously by notice given in accordance
     with this clause have been specified by that party.

14.2 A notice is deemed to be given or served -

     (A)  if delivered by hand, at the time it is left at the address;

     (B)  if sent by pre-paid post (whether ordinary first class, airmail,
          special delivery or recorded delivery), on the fourth Business Day
          after posting; and

     (C)  if sent by fax, on receipt of a clear transmission report.

14.3 In the case of a notice given or served by fax or by hand, where this
     occurs after 5.00pm on a Business Day, or on a day which is not a Business
     Day, the date of service shall be deemed to be the next Business Day.

14.4 Any notice under or in connection with this Agreement shall not be validly
     given or served if sent by email or text message.


                                    PAGE 33



15   GENERAL

15.1 Any payment to be made by any party under this Agreement shall be made in
     full without any set-off (unless otherwise provided in this Agreement or
     the parties shall agree otherwise in writing), deduction, withholding or
     counterclaim of any kind.

15.2 Without prejudice to any other limitation on the Seller's and/or Rank's
     liability under this Agreement, the maximum aggregate combined liability of
     the Seller and Rank under this Agreement (including the Tax Warranties)
     shall not exceed L3,278,509.

15.3 Any payment due by any party under clauses 4 or 5 which is not paid by or
     on the due date for payment under this Agreement shall be subject to
     interest at the rate per annum of 4 per cent. above the base lending rate
     of Barclays Bank PLC from time to time to accrue daily from the due date
     for payment until the date of actual payment.

15.4 The parties shall pay their own respective costs and expenses in connection
     with and incidental to this Agreement and the documents referred to in this
     Agreement.

15.5 Except insofar as a party is required by law or the requirements of any
     listing authority, securities exchange or regulatory or governmental body
     (including the UK Listing Authority, the London Stock Exchange, the UK
     Panel on Take-overs and Mergers or the UK Take-over Code, NASDAQ and the US
     Securities Exchange Commission) and then after consultation with the other
     parties, no public announcement of the sale and purchase of the Share or
     the terms of this Agreement shall be made by any party to any person
     without the written consent of the other parties except in the agreed form
     and subject thereto each party shall use its best endeavours to keep the
     terms of this Agreement confidential.

15.6 The Warranties and all other provisions of this Agreement, insofar as they
     have not been performed at Completion, shall not be extinguished or
     affected by and shall remain in full force and effect notwithstanding
     Completion.

15.7 This Agreement, and the documents referred to herein, constitutes the whole
     agreement of the parties in relation to its subject matter and supersedes
     any previous


                                     PAGE 34



     agreements, representations, warranties or arrangements (whether in writing
     or oral) between them in relation to the subject matter of this Agreement
     (including the exclusivity agreement between EDC and The Rank Group Plc
     dated 13 April 2006 which the Buyer (as agent for and trustee for the
     benefit of The Rank Group Plc), the Seller and EDC agree, shall terminate
     on Completion such that no party thereto shall have any further rights or
     obligations thereunder); and no modification of this Agreement shall be
     effective unless it is made in writing and duly executed and delivered as a
     deed by each of the parties.

15.8 No term of this Agreement shall be enforceable under the Contracts (Rights
     of Third Parties) Act 1999. This clause shall not affect any right or
     remedy of a third party which exists or is available apart from that Act.

15.9 Save as provided in clause 15.10, this Agreement is personal to the parties
     and a party may not assign (including by way of security), transfer,
     charge, grant security over or deal in any other manner with this Agreement
     or any of its rights under it (including the Warranties and any indemnity
     contained in this Agreement), nor purport to do any of the same, nor
     subcontract any or all of its obligations under this Agreement without
     having obtained the prior written consent of the other parties.

15.10 Subject always to clause 6.6(f) which shall apply notwithstanding the
     provisions of this clause 15.10, each of the Buyer and the Seller shall be
     entitled to assign its rights under this Agreement in whole but not in part
     to any member of the Buyer's Group or the Seller's Group, as the case may
     be, provided that it shall procure that any such company to whom it assigns
     any of its rights under this Agreement shall assign such rights back to it
     immediately prior to it ceasing to be a member of the Buyer's Group or the
     Seller's Group, as the case may be. Any assignment made pursuant to this
     clause 15.10 shall be subject to the following terms -

     (A)  no such assignment shall relieve the Buyer or the Seller, as the case
          may be, of any of its obligations under this Agreement;


                                    PAGE 35



     (B)  any such assignment shall be made on terms that the assignee
          acknowledges that the other parties to this Agreement may continue to
          deal exclusively with the assignor in respect of all matters relating
          to this Agreement at all times unless and until the assignee notifies
          the other parties in writing that it is exercising its rights as
          assignee; and

     (C)  a party's liability to any assignee in respect of any rights or
          obligations under this Agreement shall not be greater than if no such
          assignment had taken place.

15.11 The exercise, or partial exercise, of or any delay or omission in
     exercising any right conferred by this Agreement on any party shall not
     constitute a waiver of that or any other right or remedy available to that
     party nor, subject to any time limits for making claims set out in this
     Agreement, affect the right to exercise that right or remedy at a later
     time; and the rights and remedies provided in this Agreement are cumulative
     and not exclusive of any rights or remedies provided by law.

15.12 No provision of this Agreement shall exclude or limit any liability for
     fraud.

15.13 If any provision of this Agreement is held by a competent authority to be
     invalid or unenforceable in whole or in part, this Agreement shall continue
     to be valid as to its other provisions.

15.14 This Agreement may be executed in more than one counterpart and shall come
     into force once each party has executed and delivered such a counterpart in
     identical form.

15.15 This Agreement shall be governed by and construed in accordance with the
     laws of England and Wales and the parties agree to submit to the exclusive
     jurisdiction of the courts of England and Wales.

15.16 Each party irrevocably waives any objection it might have to the courts of
     England and Wales being nominated as the forum to hear and decide any
     proceedings brought before it and to settle any dispute which may arise out
     of or in any way in connection


                                    PAGE 36



     with this Agreement and agrees not to claim that the courts of England and
     Wales are not a convenient or appropriate forum for these purposes.

15.17 The Guarantor and EDC irrevocably appoint Olswang of 90 High Holborn,
     London WC1V 6XX as their process agent to receive on their behalf service
     of process in any proceedings in England and Wales. Such service shall be
     deemed completed on delivery to such process agent (whether or not it is
     forwarded to and received by the Guarantor and/or EDC). If for any reason
     such process agent ceases to be able to act as a process agent or no longer
     has an address in England and Wales the Guarantor and EDC irrevocably agree
     to appoint a substitute process agent acceptable to the Seller and to
     deliver to the Seller a copy of the new process agent's acceptance of that
     appointment within 7 days of such cessation.

15.18 The Buyer, the Guarantor and EDC irrevocably consent to any process in any
     legal action or proceedings in connection with this Agreement being served
     on them in accordance with the provisions of this Agreement relating to the
     service of notices. Nothing contained in this Agreement shall affect the
     right to serve process in any other manner permitted by law.

IN WITNESS whereof the parties have executed and delivered this Agreement as a
deed on the date first above written.


                                    PAGE 37



                                   SCHEDULE 1

                                   THE COMPANY

1    Name                              : Deluxe Global Media Services Blackburn
                                         Limited
2    Registered number                 : 4390476
3    Registered office                 : 6 Connaught Place, London W2 2EZ
4    Date and place of incorporation   : 8th March 2002, London
5    Issued share capital              : 4,131,534 ordinary shares of L1
6    Directors                         : Hamish Platt and Thomas Vale
7    Secretary                         : Clare Marianne Duffill
8    Auditors                          : PricewaterhouseCoopers LLP
9    Accounting reference date         : 31 December


                                    PAGE 38



                                   SCHEDULE 2

                                THE REAL PROPERTY



PRESENT                                                                     CURRENT
LESSEE       DATE OF                                       TERM AND BREAK   ANNUAL
(OWNER)      LEASE         PARTIES                          CLAUSE DATES    RENTAL    SHORT DESCRIPTION    USE PERMITTED BY LEASE
- -----------  -----------  ------------------------------  ---------------  --------  -------------------  -----------------------
                                                                                        
The Company  10 March     (1) RBSI Custody Bank Limited   3 years from      L75,000  Unit C Philips Road  Offices and warehouses
             2004         and RBSI Trust Company Limited  and including              Industrial Estate    or any other use within
                          (as trustees of the Merrill     1 February 2004                                 B1 and B8 with
                          Lynch Property Fund) (2)                                                        Landlord's consent
                          Deluxe Global Media Services
                          Blackburn Limited

The Company  7 January    (1) Philips Electronics UK      7 January 2003    L17,000  Building CZ Philips  B1 with ancillary
             2003         Limited (2) Disctronics         until 17 June              Works                storage
                          Blackburn Limited               2017

The Company  6 September  (1) LG Philips Displays         6 September       L37,135  Building DZ Philips  B1 or B8
             2005         Netherlands BV (trading as LG   2005 to 1 July             Works
                          Philips Displays) (2) Deluxe    2011
                          Global Media Services
                          (Blackburn) Limited

The Company  18 June      (1) Philips Electronics UK      15 years         L269,300  Buildings E, EZ, F   BI with ancillary
             2002         Limited (2) Disctronics         commencing 6               and FZ Philips       storage
                          Blackburn Limited (3)           June 2002 to 5             Works
                          Disctronics (UK) Limited        June 2017



                                    PAGE 39



                          SCHEDULE 3

              SELLER'S OBLIGATIONS ON COMPLETION

1    The Seller shall deliver or make available to the Buyer -

     (A)  a transfer of the Shares duly executed by the registered holder in
          favour of the Buyer;

     (B)  the certificate for the issued Shares in the Company;

     (C)  the Tax Covenant duly executed by the Seller and Rank as a deed;

     (D)  the Disclosure Letter signed by the Seller;

     (E)  the TSA duly executed by the Seller and Rank;

     (F)  a certified copy of any power of attorney under which this Agreement
          or any document to be delivered under this Schedule has been executed;

     (G)  a form of power of attorney in the agreed form in favour of the Buyer
          signed by the registered holder of the Shares;

     (H)  if the document has been approved by the landlord of Buildings E, EZ,
          F and FZ by Completion, the Deed of Release and Appointment of
          Guarantor in the agreed form) duly executed as a deed by Deluxe Global
          Media Services LLC and the other parties thereto other than the
          Guarantor;

     (I)  the UML Deed of Novation in the agreed form duly executed as a deed by
          the Company and Deluxe Media Service, LLC;

     (J)  the Sanctuary Letter duly executed by Sanctuary Records Group Limited;

     (K)  the Universal Deed of Release duly executed by Universal Music
          Operations Limited, the Company and Deluxe Media Service, LLC;


                                    PAGE 40




     (L)  a copy of the Seller's Group's instruction to its bankers to withdraw
          the Company from the Seller's Group's pooling arrangements;

     (M)  in the case of every director or secretary of the Company resigning,
          his written resignation and an acknowledgement by deed in the agreed
          form that he has no claim against the Company for compensation for
          loss of office or otherwise;

     (N)  in the case of the auditor of the Company resigning, a written notice
          of resignation in the agreed form containing a negative statement
          under section 394(1) of the Companies Act;

     (O)  a certified copy of the minutes of a meeting of the directors of the
          Seller resolving that the Seller should enter into this Agreement, and
          each other document to be signed by it at Completion, and authorising
          the execution of those documents by each person signing on behalf of
          the Seller;

     (P)  a certified copy of the minutes of a meeting of the directors of Rank
          resolving that Rank should enter into this Agreement, and in
          particular give the guarantee in clause 13.2, and authorising the
          execution of this Agreement and each other document to be signed by it
          at Completion; by each person signing on behalf of Rank;

     (Q)  the certificate of incorporation and any certificates of incorporation
          on change of name of the Company;

     (R)  a duly executed copy of the Form 8832 in the agreed form;

     (S)  the statutory books of the Company, including the register of members
          and charges complete and up-to-date up to but not including
          Completion; and

     (T)  the title deeds and other documents in respect of the Real Property
          listed in the agreed form Real Property Deeds List.


                                    PAGE 41



2    The Seller shall ensure that a board meeting of the Company is held at
     Completion at which -

     (A)  the people nominated by the Buyer are appointed as directors and
          secretary (as the case may be) of the Company with immediate effect;

     (B)  the resignations referred to in paragraph 1(m) of Schedule 3 are
          accepted with effect from the close of the meeting;

     (C)  Ernst & Young LLP are appointed auditors of the Company;

     (D)  the registered office of the Company is changed to the Company's
          premises in Blackburn;

     (E)  the transfer referred to in paragraph 1(a) of Schedule 3 is (subject
          only to its being duly stamped) approved for registration; and

     (F)  each existing bank mandate of the Company is cancelled and a new bank
          mandate appointing the Buyer's chosen signatories submitted to the
          relevant bank;

     and shall also ensure at Completion that an extraordinary general meeting
     of the Company is held at which the name of the Company is changed to EDC
     Blackburn Limited (and the Buyer agrees to provide to the Seller a copy of
     the relevant certificate on incorporation of change of name promptly
     following receipt of the same by the Company from the Registrar of
     Companies).


                                    PAGE 42


                                   SCHEDULE 4

                COMPLETION ACCOUNTS AND CONSIDERATION ADJUSTMENT

ADJUSTMENT TO THE CONSIDERATION

1    The Consideration shall be the Initial Consideration adjusted as follows -

     (A)  increased by the amount by which the Working Capital exceeds the sum
          of L6,666,667 or reduced by the amount by which the Working
          Capital falls short of L6,666,667;

     (B)  increased by the amount by which the Intra Group Receivables exceed
          the sum of L80,179 or reduced by the amount by which the Intra
          Group Receivables fall short of the sum of L80,179;

     (C)  increased by the amount by which the Intra Group Payables fall short
          of the sum of L888,996 or reduced by the amount by which the
          Intra Group Payables exceed the sum of L888,996;

     (D)  increased by the amount by which the Third Party Financial Debt falls
          short of the sum of L6,048 or reduced by the amount by which the
          Third Party Financial Debt exceeds the sum of L6,048; and

     (E)  increased by the amount of Cash as at Completion subject to a maximum
          of L500,000.

COMPLETION ACCOUNTS

2    The Buyer shall procure that a balance sheet as at the date of Completion
     in the agreed form and the Consideration Adjustment Statement are prepared
     for the Company in accordance with the following provisions of this
     Schedule as soon as practicable after Completion and in any event within 30
     days of Completion.


                                    PAGE 43



3    The Completion Accounts (including all items referred to in paragraph 1
     save to the extent otherwise provided in this Agreement) shall be prepared
     on bases and policies that appear, and in the order shown and subject to
     the proviso, below:

     (A)  the specific accounting policies set out in paragraph 10 below;

     (B)  to the extent not covered by paragraph 3(a) above, the policies
          adopted in the preparation of the Management Accounts;

     (C)  to the extent not covered by paragraph 3(a) or (b) above, bases and
          policies consistent with, and applied in the same way as, and
          following the same methodologies (including as to the application of
          all practices, judgments, estimates, forecasts and opinions) as, those
          adopted and applied in the preparation of the Accounts; and

     (D)  to the extent not covered by paragraph 3(a), (b) or (c) above, in
          accordance with IFRS accounting policies as at 30 June 2006,

     provided always that no account shall be taken in the Completion Accounts,
     the Working Capital or the Consideration Adjustment Statement of any
     liability of the Company relating to or arising out of or in connection
     with the state and/or condition of the Real Property, (ii) any liability to
     any landlord in respect of the same (including in respect of dilapidations
     or alterations), (iii) matters relating to the Environment and/or
     Environmental Law and (iv) any matter referred to in the Property and
     Environmental Reports unless such items appear on the P6 balance sheet of
     the Management Accounts.

4    Upon the preparation of the Completion Accounts by the Buyer -

     (A)  the Buyer shall deliver to the Seller the Completion Accounts and the
          Consideration Adjustment Statement, together with such working papers
          used in connection with the preparation of the Completion Accounts and
          the Consideration Adjustment Statement as are reasonably necessary to


                                    PAGE 44



          understand the Completion Accounts and the Consideration Adjustment
          Statement; and

     (B)  the Seller shall within the following 30 days of receipt of the same
          report to the Buyer in writing whether or not, in its opinion, the
          Completion Accounts and the Consideration Adjustment Statement have
          been prepared in accordance with the provisions of this Agreement and
          whether or not the Consideration Adjustment Statement is correct; and,
          if not, the Seller shall report in writing (to the extent it is at
          that time reasonably able to do so) the respects in which it considers
          the Completion Accounts have not been prepared in accordance with the
          provisions of this Agreement and the Consideration Adjustment
          Statement is incorrect.

RESOLVING DISAGREEMENTS

5    If the Seller gives the report referred to in paragraph 4 stating that the
     Completion Accounts have not been prepared in accordance with the
     provisions of this Agreement and the Consideration Adjustment Statement is
     incorrect, the Seller and the Buyer shall, within the period of 14 days
     following the giving of such report, use all reasonable endeavours to agree
     the Completion Accounts and the Consideration Adjustment Statement.

6    If the Completion Accounts and the Consideration Adjustment Statement are
     not agreed by the end of the period mentioned in paragraph 5, either the
     Seller or the Buyer may at any time after the end of that period refer any
     matter in dispute concerning the preparation of the Completion Accounts or
     the Consideration Adjustment Statement to an independent firm of chartered
     accountants, to be agreed upon between them and appointed jointly by the
     Seller and the Buyer or, in default of agreement, by the President for the
     time being of the Institute of Chartered Accountants in England and Wales
     on the application of the Seller or the Buyer. The accountants so appointed
     shall be instructed to deliver their determination as soon as


                                    PAGE 45



     practicable to the Seller and the Buyer and shall be deemed to act as
     experts and not as arbitrators and their decision shall be final and
     binding on the Seller and the Buyer.

7    The Seller and the Buyer agree that -

     (A)  in endeavouring to agree the Completion Accounts and the Consideration
          Adjustment Statement whether under paragraph 5 or by the appointment
          of the accountants under paragraph 6, they and any accountants
          appointed shall have regard only to, and they shall instruct such
          accountants to have regard only to, such matters and facts as are
          ascertained or capable of conclusive ascertainment on the date of the
          report referred to in paragraph 4(b); and

     (B)  any firm of accountants appointed under paragraph 6 shall determine,
          and they shall instruct such accountants to determine, only the
          particular aspect of the preparation of the Completion Accounts and
          the Consideration Adjustment Statement which is in dispute and,
          accordingly, such accountants shall not determine or adjust any other
          matter or have regard to any fact not directly relating to the matter
          in dispute.

GENERAL

8    The Seller and the Buyer shall each give such assistance as may be
     reasonably required to enable the Completion Accounts and the Consideration
     Adjustment Statement to be prepared and agreed (in accordance with
     paragraph 5); and the Buyer shall procure that proper access to the books
     of account and accounting records, including all accountants working papers
     and audit files, of the Company is given to the Seller and its agents and
     advisers for this purpose and, if applicable, to the chartered accountants
     appointed under paragraph 6, to enable them to carry out their respective
     duties under this Agreement.

9    The fees of any accountants appointed under paragraph 6 shall be borne by
     the Seller and the Buyer in such proportions as the accountants may
     determine or, in the absence of any such determination, as to one half by
     the Seller and as to one half by


                                    PAGE 46



     the Buyer; and if the Seller or the Buyer shall pay a greater proportion of
     such fees, the other party shall reimburse it immediately on demand.

10   Save where the context otherwise requires, capitalised terms in this
     paragraph refer to the line items to be included in the Working Capital
     calculation as listed in Schedule 8.

     (A)  direct materials held within Raw Material Stock shall be valued on the
          same basis as the Company's 2006 budget factory standard prices as set
          out in the Monthly Management Accounts, whilst indirect materials and
          consumables held within Raw Material Stock shall be valued at rolling
          average cost;

     (B)  provision for Obsolete Raw Material Stock shall be 6% of Raw Material
          Stock save that no provision shall be made for polycarbonate stock;

     (C)  W.I.P. Stock shall be valued at the Company's 2006 budget factory
          standard as set out in the Monthly Management Accounts and any
          overheads at 2006 budget overheads;

     (D)  Finished Stock shall be valued at the Company's 2006 budget factory
          standard as set out in the Monthly Management Accounts and any
          overheads at 2006 budget overheads;

     (E)  Maintenance Stock shall be valued at rolling average cost;

     (F)  Provision Obsolete Maintenance Stock shall only comprise a 100%
          provision for Maintenance Stock not moved after 24 months;

     (G)  Printed Matter Stock shall be valued at rolling average cost;

     (H)  Provision Obsolete Printed Matter Stock shall only comprise a 100%
          provision for Printed Matter Stock owned by the Company and not moved
          after 6 months;


                                    PAGE 47



     (I)  Goods In Transit shall be valued at the third party invoice price if
          an invoice has been received, otherwise at order value;

     (J)  Third Party Trade Debtors shall be valued at the actual customer
          invoice price and shall include the value of any cheques or other
          payments received but not yet banked into the Company's bank accounts;

     (K)  Bad Debt Provision Specific shall only comprise a specific provision
          of L2,380 in respect of debt owed by Golf Ecosse;

     (L)  Debtors Credits shall comprise any overpayments by clients;

     (M)  Sales Provisions Control shall comprise contract volume rebates and
          any known specific invoice queries;

     (N)  Deferred Tax shall be attributed a fixed value of L320,000
          (notwithstanding this attributed value, and for the avoidance of
          doubt, all of the deferred tax assets as at Completion shall be shown
          as deferred tax assets in the Completion Accounts);

     (O)  Prepayments shall comprise the prepaid element of any invoices
          received;

     (P)  Third Party Print Revenue Accrual shall comprise the monthly print
          usage to be charged to clients such as USM, MOS, Select, Naxos, Gut,
          Sixteen and Hodder;

     (Q)  Third Party Trade Creditors shall be valued at the actual price of any
          unpaid supplier invoices;

     (R)  Third Party Creditor Accruals shall only comprise any Bayer deliveries
          not invoiced, purchase ledger log accruals and purchase ledger
          revaluation;

     (S)  PAYE/NIC Creditor shall only comprise PAYE/NIC payments due to HMRC
          for the current payroll period, to the extent not yet settled;


                                    PAGE 48



     (T)  Pensions Creditor shall only comprise company and individual pension
          contributions due for the current payroll period, to the extent not
          yet paid to the pension provider;

     (U)  Payroll Control shall only comprise payroll payments for the current
          payroll period to the extent not yet paid;

     (V)  Accruals Control shall comprise accruals where a service has been
          performed or goods have been supplied or received but no invoice has
          yet been issued or received;

     (W)  Un Gain/loss Contra shall comprise a revaluation of any unpaid foreign
          exchange sales and purchase ledger invoices at current daily exchange
          rates; and

     (X)  Customs & Excise shall comprise the net of input and output VAT and
          any payments made to HMRC.


                                    PAGE 49


                                   SCHEDULE 5

                                 THE WARRANTIES

                                PART 1 - GENERAL

In this Schedule 'INDEX' means the index of disclosure documents in schedule 2
to the Disclosure Letter.

THE COMPANY

1    The particulars of the Company set out in Schedule 1 are true and accurate.

2    The Company does not have any subsidiary undertaking.

3    The copy of the memorandum and articles of association of the Company
     annexed to the Disclosure Letter is an accurate copy of that document in
     force immediately prior to Completion.

4    The Seller has all necessary power and authority to enter into and perform
     its obligations under this Agreement and all agreements to be entered into
     by the Seller pursuant to this Agreement.

5    The sale of the Shares by the Seller under this Agreement:

     (A)  will not result in a breach of any provision of the memorandum or
          articles of association of the Seller;

     (B)  will not result in a breach of, or constitute a default under, any
          agreement under which the Seller enjoys rights or by which it is
          bound; and

     (C)  will not result in a breach of any order, judgement or decree of any
          court or governmental, administrative or regulatory body or agency to
          which the Seller is party or by which the Seller is bound.


                                    PAGE 50



THE ACCOUNTS

6    The Accounts comply with the provisions of the Companies Act and have been
     prepared in accordance with the historical cost convention and
     International Financial Reporting Standards (IFRSs) practices and standards
     as adopted by the European Union.

7    The Accounts give a true and fair view of the state of affairs of the
     Company as at the end of the financial year to which they relate and of its
     profit or loss for the period ended on that date.

8    Subject to any changes required as a result of any change in law, UK GAAP
     and/or IFRSs the Accounts have been prepared applying accounting policies,
     consistent in all material respects with those used in the annual audited
     accounts for the previous financial year of the Company unless otherwise
     noted in the relevant Accounts.

MANAGEMENT ACCOUNTS

9    The Management Accounts were prepared in accordance with the principles and
     policies applied in the preparation of the management accounts of the
     Company for the 12 months to 31 December 2005.

10   Having regard to the purpose for which they were prepared and to the level
     of materiality adopted in the preparation thereof, the Management Accounts
     provide a fair view of the overall financial performance and position of
     the Company and are not materially misleading with regard to any material
     item included therein.

CREDITORS

11   Annexed to the Disclosure Letter is a list of the trade creditors of the
     Company as at 30 June 2006 to whom sums in excess of L20,000 each remain
     unpaid at 60 days after invoice.


                                    PAGE 51



BANK ACCOUNTS

12   The Disclosure Letter contains or has annexed to it the account details of
     all bank accounts of the Company.

ASSETS

13   The tangible assets owned by the Company, together with tangible assets
     held under any lease, finance lease, hire purchase, rental or credit sale
     agreements referred to in the Disclosure Letter, comprise all of the
     material tangible assets necessary for the continuation of the business of
     the Company as carried on at the date of this Agreement.

14   The Company has not granted any lien, option, mortgage or charge (save for
     any lien arising by operation of law or any supplier's retention of title)
     over its assets which remains outstanding; and, in the case of tangible
     assets, all assets of the Company are in the possession or under the
     control of the Company.

15   The Company neither owns, nor has it agreed to acquire, any shares or
     debentures in any other undertaking.

16   All material equipment owned or used by the Company at its premises is in
     reasonable repair and condition subject to fair wear and tear and having
     regard to age and usage.

17   Copies of all outstanding maintenance contracts (to the extent they exist)
     which the Company has relating to material assets and equipment owned or
     used by the Company are annexed to the Disclosure Letter.

SHARES AND DEBENTURES

18   The Shares comprise the whole of the issued and allotted share capital of
     the Company and are legally and beneficially owned by the Seller.

19   The Shares are fully paid up (or credited as fully paid up).


                                    PAGE 52



20   No person has the right to call for the allotment, sale or transfer of any
     share or debenture of the Company or to convert any securities into shares
     or debentures, or shares or debentures of a different class, of the
     Company.

21   The Company has not at any time purchased its own shares or redeemed or
     forfeited any shares, or agreed to do so, or granted an option whereby it
     might become liable to do so.

22   There is no Encumbrance over any issued or unissued shares in the capital
     of the Company, and there is no subsisting agreement to create any such
     Encumbrance.

BUSINESS

23   The Company has not received written notice of any judgment of any court
     which remains outstanding against the Company.

24   The Company holds the licences, consents, permits and approvals specified
     in the Disclosure Letter and the Company has not received written notice,
     which remains outstanding, that it has failed to comply with any of the
     material terms and conditions of such licences, consents, permits and
     approvals which are to be performed by it or that any of them is liable to
     be cancelled or revoked (save as a result of effluxion of time).

25   Since the Accounting Date -

     (A)  there has been no material adverse change in the financial position or
          business of any of the Company as a whole except as a result of
          factors generally affecting similar businesses;

     (B)  having regard to customary seasonal variations in the business of the
          Company, the business of the Company has in all material respects been
          carried on substantially in the manner it was carried on immediately
          prior to the Accounting Date;


                                    PAGE 53



     (C)  save as referred to in the Accounts, the Management Accounts or in
          this Agreement no dividend, other distribution (within the meaning of
          section 263(2) of the Companies Act 1985) or repayment of
          inter-company debt (other than trade creditors) has been declared or
          paid by the Company;

     (D)  the Company has not entered into or agreed to enter into any legally
          binding capital commitment exceeding L5,000 other than in the ordinary
          course;

     (E)  the Company has not disposed of, or granted any Encumbrance over, any
          of the fixed assets included in the Accounts;

     (F)  the Company has paid its creditors and debtors in the ordinary course
          and in accordance with past practice and no such payments have been
          made that are in any way unusual, whether in terms of early or last
          payment or otherwise, given the current point in the Company's
          business and financial cycles; and

     (G)  the Company has not made any loan which is outstanding (save to
          employees not exceeding L1,000 in the case of any one employee and
          L10,000 in aggregate) or borrowed any money which has not been repaid
          (except drawings under existing bank facilities or intra-group
          arrangements, details of which facilities and arrangements are
          disclosed by the Disclosure Letter and which are included in the
          consideration adjustment mechanics in Schedule 4 to this Agreement).

26   The Company is not, and has not agreed to become, a member of any
     partnership or joint venture.

27   The Company does not carry on business through any branch, agency or
     permanent establishment outside the United Kingdom.


                                    PAGE 54


FINANCIAL ARRANGEMENTS

28   Material particulars or copies of relevant documentation are disclosed in,
     or annexed to, the Disclosure Letter (as applicable) of all facilities for
     overdrafts, loans, hedging and other finance made available to the Company.

29   There is not outstanding any factoring agreement in respect of the
     Company's debts.

30   No person is entitled to receive from the Company any finder's fee,
     brokerage or commission in connection with this Agreement or the sale of
     the Shares.

31   The Company is not party to any outstanding guarantee in respect of the
     obligations of any other person including any other member of the Seller's
     Group.

CONTRACTUAL OBLIGATIONS

32   Details and copies (to the extent they exist) of all Material Contracts and
     contracts with members of the Seller's Group have been disclosed in or
     annexed to the Disclosure Letter.

33   So far as the Seller is aware neither it nor any counterparty is in
     material breach of any of the agreements referred to in paragraph 32, and
     the Company has not received written notice from any counterparty alleging
     any such material breach by the Company.

34   There is no subsisting dispute of a material nature between the Company and
     any other person in relation to any of the agreements referred to in
     paragraph 32 above and, so far as the Seller is aware, there are no
     circumstances which might give rise to any such dispute.

35   The Company has not given notice or received any written notice
     terminating, and it is not aware of any intention to terminate, any of the
     agreements referred to in paragraph 32 above.


                                     PAGE 55



36   The Company is not a party to any subsisting agreement:

     (A)  which is not in the ordinary course of business or which is not on
          arm's length terms;

     (B)  which cannot be terminated by the Company on 3 months' notice or less
          without compensation.

37   The Company is not a party to any agreement pursuant to which the Company
     has disposed of any shares or business and remains subject to any actual or
     contingent liability.

POWERS OF ATTORNEY AND AUTHORITIES

38   There are no subsisting powers of attorney given by the Company.

GUARANTEES

39   The Disclosure Letter contains details of all outstanding guarantees given
     by or for the benefit of the Company.

EFFECT OF AGREEMENT

40   The sale of the Shares to the Buyer does not constitute a breach or default
     under any provision of any Material Contract and does not entitle, in
     accordance with its terms, any party to a Material Contract under which the
     Company enjoys rights or by which it is bound to be released in accordance
     with the terms of that contract from any of that party's contractual
     obligations.

OFFICERS AND EMPLOYEES

41   Materially complete and accurate particulars are disclosed by the
     Disclosure Letter of the names, dates of birth, commencement of employment,
     engagement or appointment to office and notice periods of all of the
     individuals employed or engaged by the Company (whether under a contract of
     service or otherwise) (the


                                     PAGE 56



     'EMPLOYEES') and of the salary and other benefits paid or provided by the
     Company to the Employees.

42   The Company is not a party to any agreement for profit sharing or for the
     payment to its employees of bonuses.

43   The Company has not during the financial year ending on the Accounting Date
     and since the Accounting Date or (where employment or engagement or holding
     of office commenced after the beginning of that period) since the
     commencement date of employment or engagement or holding of office:

     (A)  changed, or agreed to change, the terms of its employment or
          engagement of any person who was employed by the Company on the
          Accounting Date and entitled to remuneration at a rate in excess of
          L50,000 per annum; or

     (B)  agreed any general increase in wages or wage rates.

44   No present employee of the Company has given or received notice of
     termination of his employment which has not yet expired or, so far as the
     Seller is aware, is likely to terminate his employment or engagement as a
     result of the sale of the Shares to the Buyer.

45   Materially complete and accurate particulars of trade unions recognised by
     the Company and collective bargaining arrangements to which the Company is
     party are referred to in the Disclosure Letter. There are no other
     agreements or arrangements between the Company and any trade union or other
     body representing employees, nor has the Company done any act which may be
     construed as recognition of any a trade union or other body, nor have any
     requests for recognition or arrangements for collective information and
     consultation whether under Schedule A1 of the Trade Union and Labour
     Relations (Consolidation) Act 1992 as amended, the Information and
     Consultation of Employees Regulations 2004 or otherwise, been received by
     the Company, nor are there any works councils, staff associations,
     pre-existing


                                     PAGE 57



     agreements, negotiated agreements and/or other arrangements with employee
     representatives in place.

46   The Company is not, nor has it been in the last 12 months, involved in any
     strike or lock-out or any industrial dispute with any trade union or other
     body representing any employees.

47   There are no subsisting agreements for the provision by any person of
     consultancy services or other services of personnel of or to the Company
     and there are no secondment arrangements from or to the Company in place.

48   Copies of (1) the service agreements for each of the Directors and (2) the
     contracts of employment for each of the managers and (3) all forms of
     standard contracts and agreements for Employees are annexed to the
     Disclosure Letter.

49   Materially full details of all benefits and other arrangements (whether
     contractual or discretionary) offered to the Employees or workers of, or
     persons engaged by, the Company, including without limitation copies of
     employee handbooks and policies and copies of standard contracts are
     annexed to the Disclosure Letter.

50   The Disclosure Letter contains complete and accurate details of any
     outstanding offer of employment or engagement made to any individual by the
     Company, and no individual has accepted an offer of employment or
     engagement by the Company who has not yet started his employment or
     engagement.

51   In relation to each of the Employees (and so far as relevant to each
     individual formerly employed or engaged by the Company) the Company has:

     (A)  maintained adequate and suitable records regarding the service of each
          of its employees and workers including (without limitation) records of
          working time;


                                     PAGE 58



     (B)  complied in all material respects with all collective agreements for
          the time being dealing with relations with or the conditions or
          services of its employees and workers; and

     (C)  complied with all relevant orders and awards made under any applicable
          legislation affecting the conditions of service of its employees and
          workers.

52   The Company has complied with all relevant recommendations made by the
     Advisory Conciliation and Arbitration Service and with all relevant awards
     and declarations made by the Central Arbitration Committee.

53   So far as the Seller is aware, no person now or previously employed or
     engaged by the Company has a right to return to work (whether for reasons
     connected with maternity leave, absence by reason of illness or incapacity
     or otherwise) or a right to be reinstated or re-engaged by the Company.

54   There is no agreement, arrangement, scheme, policy of insurance or legal
     obligation for the payment of any pensions, allowances, lump sums or other
     like benefits on retirement or on death or during periods of sickness or
     disablement for the benefit of any of the Company's employees or
     individuals formerly employed or engaged by the Company for the benefit of
     dependants of such individuals, save as disclosed in the Disclosure Letter.

55   There are no terms of employment or engagement for any person employed or
     engaged by the Company which provide that a change in control of the
     Company (however change of control may be defined, if at all) shall entitle
     the employee or worker to treat the change of control as amounting to a
     breach of contract or entitling him to any payment or benefit whatsoever or
     entitling him to treat himself as redundant or otherwise dismissed or
     released from any obligation.

56   The Company has no obligation to make any payment on redundancy in excess
     of the statutory redundancy payment, and the Company has not operated any
     discretionary practice of making any such excess payments.


                                     PAGE 59



57   No employee of the Company is subject to a current disciplinary warning,
     proceeding or procedure.

58   So far as the Seller is aware no employee of the Company is bound by any
     restrictive covenant (whether legally binding or not) imposed by any
     previous employer.

59   No act or omission by the Company in relation to any individual who is
     employed or engaged by the Company or their trade union or worker
     representatives has given rise to a successful claim against the Company or
     the Buyer.

60   There are no schemes in operation by or in relation to the Company under
     which any employee of the Company is entitled to any remuneration
     calculated by reference to the whole or part of the turnover, profits or
     sales of the Company or to any other form of bonus or commission.

61   The Company does not operate any approved share option scheme, share
     incentive scheme, approved profit sharing scheme, enterprise management
     incentive scheme, employee share ownership plan, savings related share
     option scheme or unapproved share scheme under which share benefits are
     provided, in respect of any person employed or engaged, or formerly
     employed or engaged, by the Company. No other company provides any such
     scheme or plan in respect of the Company's employees.

62   No contract of service or contract for services exists between the Company
     and any of its directors or employees in relation to which any relevant
     requirements of section 319 Companies Act 1985 have not been fulfilled.

63   No person, who is not either an employee or a director, whether in the
     United Kingdom or elsewhere, has formal or informal authority to negotiate
     or conclude the sale or purchase of goods or services on behalf of the
     Company, and no such person has any right to any indemnity or compensation
     whatsoever upon termination of any arrangement in connection with the
     Company.


                                     PAGE 60



64   The Company is not bound or accustomed to pay any monies other than in
     respect of:

     (A)  remuneration or emoluments of employment or pension benefits to or for
          the benefit of any individual employed or engaged by the Company; or

     (B)  the reimbursement of expenses properly incurred during the course of
          such an individual's employment or engagement with the Company.

65   So far as the Seller is aware, no amounts due to or in respect of any past
     or present employee of the Company (including all taxes, National Insurance
     contributions and pensions contributions and any other levies) are in
     arrears or unpaid in breach of any statutory or contractual obligation owed
     by the Company to such employee.

66   So far as the Seller is aware, no proposal, assurance or commitment has
     been communicated to any employee of the Company regarding any change to
     his terms of employment or engagement or working conditions or regarding
     the continuance, introduction, increase or improvement of any benefit or
     any discretionary arrangement. No negotiations have commenced in the 12
     months prior to the date of this Agreement.

67   All subsisting contracts of service and all contracts for services with any
     individual to which the Company is a party are determinable on three
     months' notice or less without giving rise to a claim for damages or
     compensation, other than a statutory redundancy payment or statutory
     compensation for unfair dismissal.

68   The Company is not involved in any industrial dispute and the Seller is not
     aware that any industrial dispute involving the Company or any of the
     persons employed or engaged by the Company has been threatened and does not
     anticipate that any of the provisions of this Agreement including (without
     limitation) the identity of the Buyer will lead to any such industrial
     dispute.


                                    PAGE 61



69   So far as the Seller is aware, the Company has not received written notice
     of any outstanding or threatened legal proceeding or grievance against the
     Company by any person who is now or has been employed or engaged by, or an
     officer of, the Company, or of any outstanding or threatened legal
     proceedings between the Company and a material number or class of its
     employees and there are no circumstances which the Seller anticipates will
     give rise to any such legal proceeding or grievance.

70   No enquiry into or investigation of the Company is pending or has been made
     or threatened by the Commission for Racial Equality, the Equal
     Opportunities Commission, any health and safety enforcement body or any
     other similar authority, there are no circumstances which the seller
     anticipates will give rise to any such enquiry or investigation.

71   During the year ending on the date of this Agreement, the Company has not:

     (A)  given nor been required by statute to give notice of any redundancies
          to the relevant Secretary of State; nor

     (B)  undertaken consultation with any trade union or employee
          representatives nor failed to comply with any obligation under Chapter
          II, Part IV of the Trade Union and Labour Relations (Consolidation)
          Act 1992.

72   So far as the Seller is aware, no employee, worker or officer of the
     Company has alleged in writing that he has made a protected disclosure
     under section 43A of the Employment Rights Act 1996 and the Seller does not
     anticipate any such protected disclosure being made.

73   So far as the Seller is aware, no employee of the Company is suffering from
     a condition which impairs his ability to perform his duties or which
     requires any adjustment within the work place pursuant to section 4A of the
     Disability Discrimination Act 1995.


                                    PAGE 62



74   There is no requirement for a work permit in relation to any employee of
     the Company, and so far as the Seller is aware the provisions of the Asylum
     and Immigration Act 1996 have been complied with in all material respects
     in respect of every employee of the Company.

75   The Company has not made any loan or advance, or provided any other form of
     financial assistance which remains unpaid or is still outstanding, to any
     past or present employee.

76   The Company has adequate employer's liability and public liability
     insurance cover having regard to the activities carried out by it. No
     claims have been made or are contemplated under such insurance policies.

77   The Company has not received any written notice or complaint from any
     employee of the Company in respect of any breach of the Health and Safety
     at Work Act 1974 or the Management of Health and Safety at Work Regulations
     1999.

INSURANCE

78   The Marsh 2005 Summary of Insurances referred to at document J7 in the
     Index provides an outline of the Rank Group Plc's insurance programme. The
     policies referred to in that summary, together with the policies referred
     to at J4 (trade credit insurance) and H41 (permanent health insurance
     scheme) in the Index comprise the insurances of the Company in force
     immediately prior to Completion ('THE INSURANCES').

79   All premiums due on the subsisting Insurances of the Company have been duly
     paid and so far as the Seller is aware (1) all other conditions of those
     policies have been performed and observed, and (2) no policy is void.

80   The Disclosure Letter contains a summary at document J9 in the Index of all
     insurance claims made by the Company during the period of two years ending
     on the date of this Agreement, and so far as the Seller is aware there are
     no circumstances


                                     PAGE 63



     which have occurred and which entitle the Company to make such a claim
     (which claim has not been made) or which require under any of the
     Insurances to be notified to the Company's insurers (and which have not
     been notified).

LEGAL PROCEEDINGS AND COMPLIANCE

81   So far as the Seller is aware, the Company is not engaged or involved in -

     (A)  any outstanding litigation, prosecution, arbitration or other legal
          proceedings (whether as plaintiff, defendant or third party), except
          for normal debt collection;

     (B)  any outstanding proceedings or enquiries before any employment
          tribunal;

     (C)  any outstanding dispute with H.M. Revenue & Customs; or

     (D)  any outstanding industrial dispute, action or matter which has been
          referred to ACAS or any other alternative dispute resolution body for
          conciliation or arbitration.

82   So far as the Seller is aware, there are no dispute resolution processes,
     proceedings and other processes or disputes such as are referred to in
     paragraph 81 pending or threatened by or against the Company.

83   So far as the Seller is aware, neither the Company nor any of its officers
     (during the course of their duties) has since 21st July 2003 done or
     omitted to do any act or thing which is in material contravention of any
     legislation in the United Kingdom to which the Company is subject which
     would have a material and adverse effect on the Company's business.

84   So far as the Seller is aware, the Company is not, nor has it been since
     21st July 2003, a party to or concerned in any agreement, concerted
     practice or course of conduct which in whole or part infringes in any
     material respect the competition or anti-trust law of England and Wales.


                                     PAGE 64



85   So far as the Seller is aware, the licences referred to in Warranty 24 are
     in full force and effect and so far as the Sellers are aware no event has
     occurred which is likely to prejudice any such licences in a manner which
     would have a material and adverse effect on the Company's business.

DATA PROTECTION

86   In this paragraph, 'PERSONAL DATA' has the meaning given to it in the Data
     Protection Act 1998.

87   So far as the Seller is aware, the Company is, and has since 21st July 2003
     been, in material compliance with all relevant requirements of -

     (A)  the Data Protection Act 1998; and

     (B)  the Privacy and Electronic Communications (EC Directive) Regulations
          2003.

88   The Company is duly registered as a data controller under the Data
     Protection Act 1998 for all purposes for which registration is required in
     respect of the processing of Personal Data by or on behalf of the Company.

INSOLVENCY

89   No order has been made or resolution passed for the winding up of the
     Company and, so far as the Seller is aware, there is not outstanding -

     (A)  any petition or order for the winding up of the Company;

     (B)  any receivership of the whole or any part of the undertaking or assets
          of the Company;

     (C)  any petition or order for the administration of the Company; or

     (D)  any voluntary arrangement between the Company and any of its
          creditors.


                                     PAGE 65



RECORDS AND DATA

90   The accounting records and all other records of the Company are kept in its
     possession or under its control.

91   The register of members is in the possession and ownership or under the
     control of the Company, has been properly kept and is accurate and up to
     date in all material respects.

92   All returns, particulars, resolutions and other documents required to be
     given or delivered by the Company to the registrar of companies after 21st
     July 2003, have so far as the Seller is aware been correctly made up in all
     material respects and duly given or delivered.

                                PART 2 - PENSIONS

CURRENT PENSION ARRANGEMENTS

93   Except for the schemes described at 93 of the Disclosure Letter (the
     'PENSION SCHEMES'), the Company is not a party to nor participates in or
     contributes to any scheme, agreement or arrangement (whether legally
     enforceable or not) for the provision of any pension, retirement, death,
     incapacity, sickness, disability, accident or other like benefits
     (including the payment after leaving employment of the Company of medical
     expenses) for any employee, director, former employee or former director of
     the Company (each a 'RELEVANT EMPLOYEE') or for the widow, widower, child
     or dependant of any Relevant Employee and the Company will not enter into
     any such arrangement before Completion.

COMMUNICATIONS AND EX GRATIA PENSIONS

94   The Company:

     (A)  has not given any undertaking or assurance (whether legally
          enforceable or not) as to the continuance, introduction, improvement
          or increase of any


                                     PAGE 66



          benefit of a kind described in paragraph 93 above or as to the rights
          of any person to receive such benefits, or

     (B)  is paying or has in the last two years paid any such benefit

          to (in either case) any Relevant Employee or any widow, widower, child
          or dependant of any Relevant Employee.

OLD DEFINED BENEFIT ARRANGEMENTS

95   So far as the Seller is aware, the Company has not in the six years before
     the date of this Agreement participated in or been a participating employer
     of any defined benefit arrangement except where there is no liability
     (actual, prospective or contingent) for the Company in respect of that
     arrangement. Where 'DEFINED BENEFIT ARRANGEMENT' means a scheme, agreement
     or arrangement under which the amount or some or all of the benefits (other
     than, for the avoidance of doubt, lump sum death in service benefits)
     payable to or in respect of a member of the scheme, agreement or
     arrangement is calculated in accordance with a formula which takes account
     of the service of the member to retirement, death or withdrawal and the
     remuneration of the member at or close to his retirement, death or
     withdrawal.

TUPE TRANSACTIONS

96   So far as the Seller is aware, no person is entitled to any enhanced terms
     as to the payment of pension or retirement benefits (whether under the
     Pension Schemes or otherwise) if he takes early retirement or is made
     redundant (or as a result of having taken early retirement or being made
     redundant) or otherwise that have passed to the Company or to any business
     previously acquired by the Company by the operation of the Transfer of
     Undertakings (Protection of Employment) Regulations 1981.

DISPUTES

97   The Company is not engaged or involved in any proceedings which relate to
     or are in connection with the Pension Schemes or the benefits thereunder
     and no such


                                    PAGE 67



     proceedings are pending or threatened and so far as the Seller is aware
     there are no facts likely to give rise to any such proceedings. In this
     paragraph, 'PROCEEDINGS' includes any litigation or arbitration and also
     includes any investigation or determination by the Pensions Ombudsman, the
     Pensions Regulator, the Occupational Pension Advisory Service or the
     Occupational Pensions Regulatory Authority or any complaint under any
     internal dispute resolution procedure established in connection with the
     Pension Schemes.

REGISTERED SCHEME

98   So far as the Seller is aware each Pension Scheme is a registered pension
     scheme (within the meaning of part 4 Finance Act 2004) and so far as the
     Seller is aware there is no reason why such registration might be withdrawn
     or might cease to apply.

MONEY PURCHASE BENEFITS

99   Other than death in service benefits, all pension benefits payable on the
     death or retirement of a member of the Pension Schemes are money purchase
     benefits within the definition of the term in section 181 of the Pension
     Schemes Act 1993 and are not guaranteed in relation to a proportion of
     remuneration and no assurance, promise or guarantee (whether written or
     oral) has been given by the Company to any employee of the Company of any
     particular level or amount of benefit payable to or in respect of him on
     retirement, death or leaving service.

DOCUMENTS DISCLOSED

100  All material details (including details on the rate and basis for the
     employer contributions) relating to the Pension Schemes are contained in or
     annexed to the Disclosure Letter. Such details give the Buyer a true and
     fair view of the Company's liabilities and responsibilities under the
     Pension Schemes.


                                     PAGE 68



LEGAL COMPLIANCE

101  So far as the Seller is aware each Pension Scheme has at all times been
     administered in all material respects in accordance with the trusts powers
     and provisions of its governing documentation and has been administered in
     accordance with and complies with all applicable legislation and the
     general requirements of trust law and other applicable laws regulations or
     requirements (including those of the Board of HM Revenue & Customs
     (formerly the Inland Revenue)).

PAYMENT ARRANGEMENT

102  The Company has complied with its obligations under section 111A of the
     1993 Act and the Personal Pension Schemes (Payments by Employers)
     Regulations 2000.

ACCESS TO MEMBERSHIP

103  Every person who has at any time been entitled to join or apply to join the
     Pension Scheme has been invited to do so as of the date on which he became
     so entitled having been informed in writing of his rights in this regard,
     and no person has been excluded from membership of the Pension Scheme or
     from any benefits thereunder in contravention of any UK or European
     Community legislation or any other applicable legislation in particular,
     but not limited to:

     (A)  sections 62 to 66 of Pensions Act 1995;

     (B)  Article 141 of the Treaty of Rome;

     (C)  the Part-Time Workers (Prevention of Less Favourable Treatment)
          Regulations (SI 2000/1551); and

     (D)  the Fixed-Term Employees (Prevention of Less Favourable Treatment)
          Regulations 2002 (SI 2002/2034).


                                    PAGE 69



STAKEHOLDER PENSION

104  The Company has no obligation to facilitate access to a stakeholder pension
     scheme under section 3 of the Welfare Reform and Pensions Act 1999.

CONTRIBUTION NOTICE

105  The Company is not subject to a contribution notice or financial support
     direction and so far as the Seller is aware no facts or circumstances exist
     under which the Pensions Regulator could impose one.

STATUTORY DEBT

106  The Company is not indebted to the trustees of a pension scheme pursuant to
     section 75 to 75A Pensions Act 1995.

                           PART 3 - THE REAL PROPERTY

107  The properties listed in Schedule 2 are the only properties owned or
     occupied by the Company.

108  Each property comprised within the Real Property is occupied by the
     Company.

109  The information about the Real Property set out in Schedule 2 is correct
     and accurate in all material respects.

110  All material deeds and documents necessary to prove the title of the
     Company to the Real Property are in the possession of or under the control
     of the Company. .

111  The Company's interest in the Real Property is free from any mortgage,
     debenture or charge (whether specific or floating, legal or equitable)
     securing the repayment of monies. The Real Property is not subject to
     outgoings other than business rates, water rates, and insurance premiums,
     rent and service charge and any other sums payable under the leases listed
     in Schedule 2.


                                     PAGE 70



112  So far as the Seller is aware, the existing use of the Real Property is a
     permitted use for the purposes of the Planning Acts, as defined in section
     336 of the Town and Country Planning Act 1990.

113  The Company has paid the rents payable under the leases listed in Schedule
     2 (so that there are no arrears) and no written notice alleging any breach
     of the covenants on the part of the tenant contained in the leases listed
     in Schedule 2 remains outstanding.

114  The Company does not have any continuing liability in respect of any other
     property formerly owned or occupied by the Company either as original
     contracting party or by virtue of any direct covenant given on a sale or
     assignment to the Company as a guarantor of the obligations of any other
     person in relation to such property.

115  The written replies given by the Seller's Solicitors to the written
     enquiries before contract raised by the Buyer's Solicitors relating to the
     Real Property are true, complete and accurate in all material respects.

                                  PART 4 - TAX

PAYMENTS OF TAX

116  The Company:

     (A)  has duly and punctually paid all Tax which it has become liable to
          pay;

     (B)  has duly deducted, withheld or collected for payment (as appropriate)
          all Tax due to have been deducted, withheld or collected for payment
          and has accounted for or paid all such Tax to the relevant Tax
          Authority; and

     (C)  is not, and has not at any time within the last seven years been,
          liable to pay any interest, penalty or surcharge in respect of any
          unpaid Tax or as a result of a default in respect of any Tax matter or
          has otherwise been subject to the operation of any penal provision
          under any enactment relating to Tax.


                                     PAGE 71



TAX RETURNS

117  All returns, computations, information, accounts and notices which are or
     have been required to be made or given by the Company for any Tax purposes
     have been made or given both within the requisite periods and on a proper
     basis and were when made and remain true and accurate and none of them is,
     or so far as the Warrantors are aware is likely to be, the subject of any
     enquiry, query or dispute with H.M. Revenue and Customs or other Tax
     Authority.

COMPLIANCE

118  The Company has complied at all times in accordance with normal commercial
     practice with all statutory requirements, regulations, notices, orders,
     directions and conditions relating to all relevant Taxes, including the
     terms of any agreement made with H.M. Revenue and Customs. The Company has
     obtained, maintained and preserved complete, accurate and up to date
     records as required for all Tax purposes.

TAX RECORDS

119  The Company has all necessary records to calculate any Tax liability or
     Relief or to otherwise determine the Tax consequences that would arise on
     the disposal or on the realisation of each asset owned by it at the
     Accounting Date, or acquired since the Accounting Date but before
     Completion.

TAX DISPUTES

120  The Company is not, nor has it been at any time within the last seven
     years, involved in any dispute with or investigation, audit or discovery by
     any Tax Authority or any enquiry into any Tax return, computation,
     information, accounts or notice and so far as the Warrantors are aware no
     such dispute, investigation, audit, discovery or enquiry is pending,
     planned, threatened or likely to arise.


                                     PAGE 72



PROVISIONS IN ACCOUNTS

121  The provisions or reserve for Tax appearing in the Accounts are sufficient
     (on the basis of the rates of Tax current at the date of this Agreement) to
     cover all Tax for which the Company was at the Accounting Date, or may
     after that date become, liable to pay or account in respect of any period
     ended on or before the Accounting Date.

122  Proper provision has been made and shown in the Accounts for deferred
     taxation in accordance with generally accepted accounting principles
     including, where relevant, International Accounting Standards and no
     transfer from or reduction in the deferred tax account or any other reserve
     in respect of deferred tax has been made or will be made by the Company on
     or before Completion.

POSITION SINCE THE ACCOUNTING DATE

123  In respect of the period starting immediately after the Accounting Date,
     the Company has no liabilities for Tax other than:

     (A)  corporation tax payable in respect of normal trading profits;

     (B)  income tax payable pursuant to PAYE and national insurance
          contributions, in each case, payable in respect of amounts that the
          Company is contractually obliged to pay to its employees and
          directors; and

     (C)  VAT on supplies of goods and services made by the Company in the
          ordinary course of its business.

124  No accounting period of the Company for corporation tax purposes has ended,
     and the Company has not made any distribution since the Accounting Date.

125  No liability to Tax (other than VAT) would arise if the Company were to
     dispose of an asset acquired since the Accounting Date for a consideration
     equal to that actually given for the acquisition.


                                     PAGE 73



SECONDARY LIABILITIES

126  The Company is not, nor so far as the Warrantors are aware is it likely to
     become, liable to pay, or make reimbursement or give an indemnity in
     respect of, any Tax (or amounts corresponding to Tax) in consequence of the
     failure by any other person to discharge that Tax within any specified
     period or otherwise including without limitation liability under sections
     767A, 767AA and 777(8) ICTA, sections 189, 190 and 191 TCGA, section 96
     Finance Act 1990 and paragraph 68 of schedule 29 Finance Act 2002, where
     that Tax relates to a profit, income or gain, transaction, event, omission
     or circumstance arising, occurring or deemed to arise or occur on or before
     the date of this Agreement.

SPECIAL ARRANGEMENTS

127  No Tax Authority has agreed to operate any special arrangement (being an
     arrangement not based on a strict and detailed application of the relevant
     legislation) in relation to the affairs of the Company, the Company has not
     taken any action which would or might alter, prejudice or in any way
     disturb any arrangement or agreement which it has negotiated with any Tax
     Authority nor will any transaction carried out pursuant to this Agreement
     have such an effect.

ENTITLEMENTS TO APPEAL

128  The Disclosure Letter contains full details of all matters relating to Tax
     in respect of which the Company (either alone or jointly with any other
     person) has, or at Completion will have, an entitlement to make any appeal
     against an assessment to or determination affecting Tax, or to make any
     application for the postponement of Tax.

CLEARANCES AND CONSENTS

129  All clearances and consents obtained by the Company from any Tax Authority
     have been fully disclosed in the Disclosure Letter and were based on full
     and accurate disclosure of all the facts and circumstances material to the
     decision of the Tax Authority. The Company has complied in all respects
     with any conditions to which


                                     PAGE 74



     any such consents or clearances are subject and has not taken any action
     which might alter, prejudice or in any way disturb any such consent or
     clearance nor will anything done pursuant to this Agreement have such an
     effect.

CLOSE COMPANIES

130  The Company is not, nor has been, so far as the Seller is aware, at any
     time during the seven years ended on the Accounting Date, a close company
     or a close investment-holding company as defined in section 13A ICTA.

INHERITANCE TAX

131  The Company is not liable, nor is it aware of any circumstances in
     existence as a result of which it may become liable, to be assessed to
     inheritance tax or any other Taxation as donor or donee of any gift, or
     transferor or transferee of value and there are so far as the Seller is
     aware no other circumstances by reason of which any liability in respect of
     inheritance tax has arisen or could arise for the Company or any charge in
     relation to unpaid inheritance tax has arisen or could arise in respect of
     the assets of the Company or the Share.

RESIDENCE AND PRESENCE OUTSIDE THE UK

132  The Company is, and so far as the Seller is aware always has been and will
     be at Completion resident in the United Kingdom for Tax purposes. The
     Company is not, so far as the Seller is aware never has been and will not
     be at Completion resident for any purpose in any other jurisdiction and
     does not have, so far as the Seller is aware has never had and will not
     have at Completion any branch, office, permanent establishment or other
     taxable presence in any other jurisdiction.

CONDITIONAL AND CONVERTIBLE SHARES

133  The Share is neither a conditional share nor a convertible share within the
     provisions of sections 140A to 140D ICTA.


                                     PAGE 75


EMPLOYMENT RELATED SECURITIES

134  No employment related securities (as defined in section 421B(8) ITEPA) or
     securities options (as defined in section 471 ITEPA) in relation to which
     the Company is, has been or will be the employer (as defined in section
     421B(8) ITEPA) have been acquired by any person since 15 April 2003.

EMPLOYER'S NATIONAL INSURANCE ELECTIONS

135  The Company has not made any joint elections to transfer the liability for
     employer's secondary Class 1 national insurance contributions pursuant to
     section 4(4)(a) Social Security Contributions and Benefits Act 1992 onto
     the employee.

CAPITAL ALLOWANCES

136  All capital expenditure incurred or to be incurred by the Company prior to
     Completion has qualified and continues to qualify for capital allowances
     and full disclosure has been made in the Disclosure Letter of all
     allowances made to the Company and the book value of each of the assets of
     the Company in or adopted for the purposes of the Accounts does not exceed
     the written down value of such asset for the purposes of the Capital
     Allowances Act 2001 ("CAA") or where the assets form a pool for the
     purposes of the CAA does not exceed the pool of qualifying expenditure.

ROLLOVER RELIEF

137  The expenditure allowable as a deduction for the purposes of the
     computation of any chargeable gain or allowable loss attributable to any
     asset of the Company for the purposes of corporation tax on chargeable
     gains is (ignoring indexation) not less than the value of that asset as
     shown in the Accounts.

HOLD-OVER RELIEF

138  There are set out in the Disclosure Letter full details of any held-over
     gains within section 152 TCGA.


                                     PAGE 76



DEGROUPING CHARGES

139  Neither the signing of this Agreement nor the sale of the Share to the
     Buyer nor any other event since the Accounting Date will result in any
     profit or gain being deemed to accrue to the Company for Tax purposes,
     whether pursuant to section 179 TCGA, paragraph 58 of schedule 29 Finance
     Act 2002 (Degrouping) or otherwise and the Company does not own any asset
     in respect of which any such liability may arise in the future.

GROUPS

140  No tax is or may become payable by the Company pursuant to section 190 TCGA
     in respect of any chargeable gain accrued before the date of this
     Agreement, and the Company has not at any time within the period of six
     years ending on the date of this Agreement transferred any assets other
     than trading stock to any company which at the time of disposal was a
     member of the same group (as defined in section 170 TCGA).

141  All claims by the Company for group relief were when made, and so far as
     the Seller is aware are now, valid and have been, or so far as the Seller
     is aware will be, allowed by way of relief from corporation tax.

142  The Company has received and/or paid all payments due to it and/or due from
     it under any arrangement or agreement made by it for the surrender of group
     relief.

143  No notice has been given under section 102(2) Finance Act 1989 (surrender
     of company tax refund within group) by the Company.

144  The Company has made all the necessary elections pursuant to section 171A
     TCGA (notional transfers within a group) and the Disclosure Letter contains
     particulars of all such elections made under section 171A TCGA.


                                     PAGE 77



TRANSFER PRICING

145  No transactions or arrangements involving the Company have taken place or
     are in existence which are such that the provisions of section 770, 770A or
     schedule 28AA ICTA or equivalent legislation or legal principles in any
     other jurisdiction have been or could be applied thereto. The Company is
     not nor has it been, involved in any correspondence, enquiry or dispute in
     any jurisdiction concerning the adjustment of profits of associated
     enterprises for taxation purposes.

STAMP DUTY

146  All documents in the possession of the Company or to the production of
     which it is entitled and which attract stamp or transfer duty in the United
     Kingdom or elsewhere have been properly stamped. The Company does not own
     any interest in UK land or buildings which is evidenced by an uncompleted
     contract.

STAMP DUTY LAND TAX

147  The Company has paid all stamp duty land tax which it is liable to pay and
     has made all land transaction returns it is obliged to make within 30 days
     of the effective date of the transaction.

STAMP TAXES - GROUPS

148  The Company has not made any claim for relief or exemption under section 42
     Finance Act 1930, section 76 Finance Act 1986, section 151 Finance Act 1995
     or stamp duty land tax under schedule 7 Finance Act 2003 in respect of any
     interest in UK land or buildings which was transferred or granted to it at
     any time within the last six years.

TAX AVOIDANCE

149  The Company has not entered into any transaction or series of transactions,
     scheme or arrangement of which the main purpose, or one of the main
     purposes, was the


                                     PAGE 78



     avoidance or reduction of a Taxation liability on the part of the
     Company or for which there was no commercial purpose.

INTANGIBLE ASSETS

150  No debits or credits would arise for the Company pursuant to schedule 29
     Finance Act 2002 if any intangible fixed asset of the Company was disposed
     of for a consideration equal to the book value shown in or adopted for the
     purpose of the Accounts.

VAT

151  The Company is a taxable person registered for the purposes of VAT and its
     registration is not subject to any conditions imposed by or agreed with HM
     Revenue & Customs.

152  The Company:

     (A)  has not agreed any special method of attributing, accounting or
          otherwise in relation to VAT with H.M. Revenue & Customs;

     (B)  does not own any capital items which are subject to Part XV of the
          Value Added Tax (General) Regulations 1995; and

     (C)  does not own any land or buildings (including any interest in or right
          over any land or buildings) in respect of which it or a relevant
          associate (within the meaning of paragraph 3(7) of Schedule 10 to
          VATA) of it has made an election to waive exemption pursuant to
          paragraph 2 Schedule 10 VATA.

NON UK TAXES

153  Paragraphs 1 to 33 above shall apply mutatis mutandis in relation to Tax
     outside the United Kingdom and accordingly any reference in those
     paragraphs to any form of Tax or Relief or any statutory provision relating
     to Tax in the United Kingdom shall be deemed to include a reference to the
     equivalent or substantially equivalent form of


                                     PAGE 79



     Tax or Relief or statutory provision relating to Tax in any other relevant
     taxing jurisdiction.

154  Neither the Seller nor any member of the Seller's group has 'checked the
     box' for the purposes of United States income tax.

                             PART 5 - ENVIRONMENTAL

DEFINITIONS

                        
'ENVIRONMENTAL LICENCES'   means any permit, licence, authorisation, consent or
                           other approval required by any Environmental Law at
                           the date of this Agreement for the operation of the
                           business as carried on by the Company at the Real
                           Property;

'HAZARDOUS MATERIAL'       means any waste, effluent, pollutant, contaminant or
                           other substance which alone or in combination with
                           others is capable of causing harm or damage to the
                           Environment.



155  The Company holds and is in compliance in all material respects with all
     Environmental Licences which are necessary for the purpose of carrying on
     its business as carried on at the date of this Agreement and all such
     Environmental Licences are in full force and effect.

156  Neither the Company nor any of its officers, agents or employees (during
     the course of their duties) has done or omitted to do any act or thing
     which contravenes to a material extent Environmental Law and the Company
     has not received any written notice which is outstanding at the date of
     this Agreement stating that a breach of Environmental Law has occurred.

157  The Company has not received any written notification, nor is it aware that
     any such notification is likely to be issued prior to Completion, that any
     material Environmental Licence (other than those already obtained by the
     Company) will be required under


                                     PAGE 80



     Environmental Law within six months from the date of this Agreement to
     enable the Company to continue its business as at present carried on.

158  No application by the Company for, or to surrender, transfer or vary the
     terms of, any Environmental Licence is pending or has been refused for any
     reason.

159  So far as the Seller is aware, there has not been any release of any
     Hazardous Material on the Real Property or on any other property or into
     the Environment as a result of any act or omission of the Company.

                         PART 6 - INTELLECTUAL PROPERTY

DEFINITIONS

                               
'BUSINESS INTELLECTUAL            means the Intellectual Property which prior to
PROPERTY'                         Completion is used in connection with the
                                  business of the Company;

'INTELLECTUAL PROPERTY'           means all intellectual property rights,
                                  including (without limitation) patents,
                                  supplementary protection certificates, petty
                                  patents, utility models, Trade Marks, database
                                  rights, rights in designs, copyrights and
                                  topography rights (whether or not any of these
                                  rights are registered, and including
                                  applications and the right to apply for
                                  registration of any such rights) and all
                                  inventions, know-how, trade secrets,
                                  techniques and confidential information,
                                  customer and supplier lists and other
                                  proprietary knowledge and information, and all
                                  rights and forms of protection of a similar
                                  nature or having equivalent or similar effect
                                  to any of these which may subsist anywhere in
                                  the world, in each case for their full term,
                                  and together with any renewals or extensions
                                  but in all cases excluding all and any rights
                                  in or to use computer software;

'LICENCE'                         means any licence, permission or consent in
                                  respect of the use of any Intellectual
                                  Property (including any unwritten and/or
                                  informal licensing arrangement); and




                                     PAGE 81



                               
'TRADE MARKS'                     means those business names, domain names,
                                  registered and unregistered trade marks and
                                  applications for registration of any of the
                                  foregoing.



OWNERSHIP

160  The Company is either the sole legal and beneficial owner of the Business
     Intellectual Property, or the Company has a valid Licence to use all
     Business Intellectual Property which it uses and material particulars or
     copies of all such Licences are disclosed in or attached to the Disclosure
     Letter.

161  The sale of the Shares to the Buyer does not constitute a default under the
     provisions of any Licence under which the Company enjoys rights or by which
     it is legally bound and does not entitle, in accordance with its terms, any
     party to any such Licence to be released in accordance with the terms of
     that licence from any of that party's contractual obligations

162  The only names used by the Company as business names under which it carries
     on its business are the Business Names and its corporate name.

163  The Company has not registered in its name any Trade Marks or other
     Intellectual Property and there are no outstanding applications on the part
     of the Company to register the same.

LICENCES

164  Save for licences (express or implied) from customers for the purpose of
     the Company's manufacture of CD's for those customers, the only Licences
     held by or on behalf of the Company immediately prior to the date hereof
     are the Deluxe Trade Mark Licence, the patent licence agreement for
     non-standard multi-session CD audio discs referred to at document E3 in the
     Index and the CD disc patent licence agreement referred to at document E1
     in the Index.


                                     PAGE 82



165  The Intellectual Property owned by the Company or used by the Company
     pursuant to a Licence comprises in all material respects all the
     Intellectual Property necessary to carry on the business as conducted by it
     immediately prior to the date of this Agreement.

166  So far as the Seller is aware, no party to any Licence which is material to
     the conduct of the Company's business as carried on immediately prior to
     the date of this Agreement is in breach of it, and the Company has not
     received notice of breach or termination of any such Licence.

INFRINGEMENTS

167  No activities, products, services or processes of the Company (or any
     licensee under any Licence granted by the Company) or, so far as the Seller
     is aware, the Business Intellectual Property infringe any Intellectual
     Property of a third party or involve the unlicensed use of a third party's
     confidential information or give rise to liability to pay compensation.

168  As far as the Seller is aware, the Company has not disclosed (except in the
     ordinary course of business or subject to a binding confidentiality
     agreement) any commercially sensitive confidential information or know-how
     owned by the Company other than to members of the Seller's Group.

CONFIDENTIAL INFORMATION AND KNOW HOW

169  The Company has at all times kept confidential all confidential information
     in respect of the Company's customers the disclosure of which might cause
     loss or damage to or adversely affect the Company.

CLAIMS

170  No claims, disputes or proceedings in respect of Business Intellectual
     Property have been settled in the period of two years ending on the date of
     this Agreement or so far as the Seller is aware are current, pending or
     threatened.


                                     PAGE 83


                         PART 7 - INFORMATION TECHNOLOGY

                              
DEFINITIONS

'DEVELOPED SOFTWARE'             means all computer programs owned by a third
                                 party which are designed, written or developed
                                 specifically for the use of the Company;

'HARDWARE'                       means all information technology,
                                 telecommunications, network and peripheral
                                 equipment used by or on behalf of the Company;

'INTELLECTUAL PROPERTY'          has the same meaning as in part 6 of this
                                 Schedule;

'IT SYSTEMS'                     means all Hardware and Software used by or on
                                 behalf of the Company;

'PACKAGE SOFTWARE'               means all computer programs owned by a third
                                 party which are used by or on behalf of the
                                 Company excluding any Developed Software;

'PROPRIETARY SOFTWARE'           means all computer programs designed, written
                                 or developed specifically for the use of the
                                 Company excluding any Developed Software;

'SOFTWARE'                       means all Developed Software, Package Software
                                 and Proprietary Software; and

'SOURCE CODE'                    means a version of the relevant Software in the
                                 language in which it was programmed (including
                                 all programmers' comments) together with all
                                 related manuals, documentation, working papers,
                                 diagrams, charts, data and other information in
                                 an accessible and readable format which are
                                 necessary or reasonably desirable to enable a
                                 reasonably skilled programmer to understand,




                                    PAGE 84



                              
                                 modify, correct, maintain, support and
                                 replicate the Software without the assistance
                                 of a third party.



THE HARDWARE

171  The Company owns or is permitted under agreement to use the Hardware. The
     Disclosure Letter contains a list of all such agreements and copies of all
     material such agreements.

DEVELOPED SOFTWARE AND PACKAGE SOFTWARE

172  The Company is licensed to use the Developed Software and the Package
     Software. The Disclosure Letter contains a list of all such licences and
     copies of all material such licences.

SOURCE CODE

173  The Company is not a party to any agreements in respect of the deposit of
     Source Code in escrow in relation to the Developed Software.

PROPRIETARY SOFTWARE

174  The Disclosure Letter contains material details of the Proprietary
     Software.

175  The Company owns and has in its possession all Proprietary Software and all
     Source Code relating to the Proprietary Software.

176  So far as the Seller is aware, the Proprietary Software does not contain
     any embedded software in which the Intellectual Property is owned by a
     third party nor is any licence of third party software required in order to
     use the Proprietary Software.

ADEQUACY OF IT SYSTEMS

177  The IT Systems are the only information technology systems required by the
     Company to carry on its business and all the IT Systems are in the
     possession of the Company. No third party provides any part of the IT
     Systems under any outsourcing,


                                    PAGE 85



     application service provider, hosting or similar arrangement. None of the
     IT Systems are provided to the Company by the Seller or any member of the
     Seller's Group.

178  The IT Systems are adequate for the Company to carry on its business as
     carried out at the date of this Agreement.

OPERATION AND MAINTENANCE OF IT SYSTEMS

179  The IT Systems have in the two year period prior to the date of this
     Agreement been properly and regularly maintained and replaced. The
     Disclosure Letter contains a list of all maintenance and support agreements
     relating to the IT Systems and copies of all material such agreements.

180  There has been no material disruption or interruption to the business of
     the Company in the two year period ending on the date of this Agreement due
     to failures, bugs or breakdowns of the IT Systems or any part of them and
     so far as the Seller is aware there are no circumstances which may give
     rise to such a disruption or interruption.

SECURITY OF IT SYSTEMS

181  The Company implements, maintains and keeps up-to-date:

     (A)  reasonable industry-standard physical and logical security processes
          and software to protect the IT Systems and any information held on
          them;

     (B)  reasonable industry-standard procedures to prevent unauthorised access
          or the introduction of viruses or similar destructive code;

     (C)  reasonable industry-standard procedures for the taking and storing
          on-site and off-site of back-up copies of the Software and any data
          held on the IT Systems; and

     (D)  reasonable industry-standard back-up systems and disaster recovery
          systems and procedures intended to enable the Company to continue to
          function


                                     PAGE 86



          without any material disruption or interruption in the event of a
          failure, bug or breakdown of any part of the IT Systems or the
          destruction, corruption or loss of access to any of the data held on
          the IT Systems.

     The processes, procedures, software and systems mentioned in this paragraph
     are 'reasonable' in the sense that they involve a balance between the level
     of security appropriate to the data being processed, convenience of use,
     and cost.

DISPUTES

182  So far as the Seller is aware, no party is in breach of the terms of any
     agreement or licence relating to the IT Systems.

183  There are no on-going disputes regarding the operation or performance of
     the IT Systems.


                                    PAGE 87


                                   SCHEDULE 6

                           LIMITATIONS AND EXCLUSIONS

INTERPRETATION AND APPLICATION

1    In this Schedule 'CLAIM' means a claim under the Warranties other than a
     claim in respect of the Tax Warranties. The provisions of the Tax Covenant
     shall apply to limit or exclude the liability of the Seller under the Tax
     Warranties.

FRAUD

2    The limitations and exclusions set out in this Schedule shall not apply to
     the Seller in relation to any Claim which arises or, to the extent to which
     any Claim arises, to the increase in the amount of the Claim, as a
     consequence of fraud by the Seller, any member of the Seller's Group, or
     any officer, director or employee of the Seller.

TIME LIMIT FOR MAKING CLAIMS

3    The Seller shall not be liable for a Claim unless and except to the extent
     that -

     (A)  the Buyer gives to the Seller written notification of the particulars
          of the Claim in reasonable detail (including the amount claimed)
          before 31st May 2008;

     (B)  liability for the Claim is accepted by the Seller in writing or court
          proceedings in accordance with this Agreement in respect of the Claim
          are instituted and duly served in either case within 180 days from the
          date of notification of the Claim under paragraph 3(a).

     Time shall be of the essence for the purpose of this paragraph.

EXCLUSION OF SMALL CLAIMS

4    The Seller shall not be liable for a Claim unless the amount payable in
     respect of that Claim -


                                    PAGE 88



     (A)  individually exceeds L5,000 (five thousand pounds); and

     (B)  in aggregate exceeds L50,000 (fifty thousand pounds) when added to the
          amount which is payable in respect of every other Claim which exceeds
          the individual claims threshold in paragraph 4(a), in which case the
          Seller may be liable for the full amount of the Claim and not just the
          excess above L50,000 (fifty thousand pounds).

5    For the purpose of determining the amount of the Claim in paragraphs 4(a)
     and (b), no account will be taken of any amount for which the Seller has no
     liability by virtue of any other paragraph of this Schedule and, subject
     thereto, the amount of the Claim shall be taken as being the amount agreed
     or finally determined to be payable in respect of that Claim.

BUYER'S KNOWLEDGE

6    The Seller shall not be liable for a Claim in respect of any matter of
     which the Buyer has actual knowledge at the date of this Agreement and the
     Buyer shall be deemed to have actual knowledge of all matters which are to
     be regarded as disclosed in accordance with clause 8.2. For the purposes of
     this paragraph 6, actual knowledge of the Buyer shall be the actual
     knowledge of Roger Morgan, Clarke Bailey and Matthew Behrent.

OTHER LIMITATIONS OF LIABILITY

7    The Seller shall not be liable for any Claim -

     (A)  which arises in respect of any breach of Warranty which is capable of
          remedy except to the extent that the relevant breach remains
          unremedied after the expiry of 30 days following receipt by the Seller
          of a written notice from the Buyer giving reasonable particulars of
          the relevant breach;

     (B)  to the extent of any amount which is allowed for, provided against,
          reserved for or otherwise taken into account in the Accounts, the
          calculation of the


                                    PAGE 89



          Consideration, the Completion Accounts or the Consideration Adjustment
          Statement or of which details in relation to the liability to which
          the Claim relates are given in a note to the Accounts or the
          Completion Accounts or to the extent that the subject matter of the
          Claim is otherwise taken into account in determining the Consideration
          or an adjustment to the consideration for the Shares in accordance
          with clause 5.2;

     (C)  to the extent that the Claim would arise or the amount of the Claim
          would be increased as a result of -

          (I)  the enactment of any legislation;

          (II) the introduction of any new regulatory requirement or any new
               requirement of any administrative or regulatory body;

          (III) a judgment or change in the interpretation or application of any
               law, regulation or of any ruling or practice of any regulatory or
               administrative authority (including Tax authorities);

          (IV) a change in the basis or method of calculation of Tax; or

          (V)  the amendment, modification or withdrawal of any concession,
               exemption or other treatment previously made available;

          in each case made or coming into force or effect after the date of
          this Agreement;

     (D)  if claims lie under both the Warranties and the Tax Covenant in
          respect of the same matter, to the extent that the claim under the Tax
          Covenant has been satisfied;

     (E)  to the extent that the liability to which the Claim relates is
          attributable to any act, omission, transaction or arrangement of -


                                    PAGE 90



          (I)  the Buyer's Group (excluding the Company) before or after
               Completion; and/or

          (II) the Company (or persons deriving title from it) that was done,
               occurred, was effected or made after Completion (excluding any
               act, omission, transaction or arrangement pursuant to a legally
               binding obligation entered into by the Company prior to
               Completion and any act, omission, transaction or arrangement
               which is within the ordinary course of business of the Company as
               carried on immediately prior to Completion); or

     (F)  to the extent that the Buyer's Group is entitled to claim under any
          insurance policy or contract against the loss or damage suffered as a
          result of the circumstances giving rise to the Claim.

8    The amount of the Seller's liability for any Claim shall be reduced by -

     (A)  the amount, if any, by which any Tax for which the Buyer's Group would
          be liable but for the circumstances giving rise to the Claim is
          reduced or extinguished by reason of the circumstances giving rise to
          the Claim; and

     (B)  any sum which is recovered (whether by way of insurance,
          indemnification or otherwise) by the Buyer's Group (otherwise than
          from another of those companies) in respect of the loss or damage
          suffered by reason of the relevant breach, less the amount of any
          reasonable costs and expenses incurred in obtaining payment of that
          sum, and if the Seller has paid to the Buyer any amount in respect of
          the Claim before the recovery of that sum, the Buyer shall repay to
          it, or procure the repayment to it of, the amount by which his
          liability is so reduced.

9    The Buyer shall not be entitled to recover damages or otherwise obtain
     reimbursement or restitution more than once in respect of the same loss or
     matter under this Agreement and/or the Tax Covenant.


                                    PAGE 91



10   If the Claim arises in connection with a liability of the Company which, at
     the time at which the Claim is notified to the Seller, is contingent then
     the Seller will have no obligation to make any payment to the Buyer in
     respect of that breach unless and until such time as the contingent
     liability ceases to be contingent and becomes an actual liability. So long
     as any Claim arising by reason of a contingent liability shall have been
     notified to the Seller in accordance with paragraph 3(a), then paragraph
     3(b) shall be amended in relation to such Claim so as to require that
     liability for the Claim be accepted by the Seller in writing or court
     proceedings in respect of the Claim be instituted and duly served within
     180 days from the date on which the said liability ceases to be contingent.

PROCEDURE FOR MAKING A CLAIM

11   If the Buyer or any member of the Buyer's Group becomes aware of any matter
     which gives or might give rise to a Claim -

     (A)  the Buyer's Group shall as soon as reasonably practicable inform the
          Seller of such matter and shall consult with the Seller where
          reasonably possible before making any admission of liability in
          connection with the matter and the Buyer's Group shall at all times
          act in good faith in dealing with any such matter or making any
          admission of liability;

     (B)  subject to it being indemnified to its reasonable satisfaction against
          all costs and expenses which might be incurred by it and which it
          would not otherwise incur, the Buyer's Group shall take all such steps
          as the Seller may reasonably request in relation to the matter and
          which the Buyer's Group shall consider reasonable in the circumstances
          (provided always that the Buyer's Group shall not be required to take
          any step in relation to any customer contract or which would have an
          adverse effect on its business or reputation); and

     (C)  the Buyer shall give written notice to the Seller as soon as
          reasonably practicable specifying (1) the matter in reasonable detail
          and enclosing copies of all documents in the possession or under the
          control of the Buyer's Group


                                    PAGE 92



          so far as they relate to that matter, (2) the Warranties which have or
          which are likely to have been breached, (3) its best estimate of the
          amount of the Claim and shall continue to inform and consult the
          Seller (and will consider taking into account the Seller's reasonable
          suggestions) in relation to material developments in relation to such
          matter.

     The Buyer shall procure that each member of the Buyer's Group complies with
     this paragraph.

12   The Buyer shall procure that the Buyer's Group shall take all reasonable
     steps to mitigate any loss or damage resulting from or arising as a
     consequence of any circumstances giving rise to any Claim.


                                    PAGE 93



                                   SCHEDULE 7

                                   COMPETITION

                             PART 1 - INTERPRETATION

1    In this Schedule -

     'RESTRICTED BUSINESS' means the business of the Company as carried on at
     Completion of replicating audio compact discs ('CDS') and CD-Roms for
     rights owners (excluding for the avoidance of doubt the replication of DVDs
     and the distribution and packaging of VHS cassettes, CDs, DVDs and
     CD-Roms); and

     'RESTRICTED TERRITORY' means Great Britain.

                              PART 2 - RESTRICTIONS

2    Except as provided in part 3 of this Schedule, the Seller will not, and
     every member for the time being of the Seller's Group will not, directly or
     indirectly, alone or jointly with any other person, and whether as
     shareholder, partner, director, principal, consultant or agent in any other
     capacity -

     (A)  for a period of 3 years from the date of Completion within the
          Restricted Territory carry on any Restricted Business; and

     (B)  for a period of 3 years from the date of Completion within the
          Restricted Territory and to the detriment of the Restricted Business,
          solicit away from the Company any of its employees as at Completion,
          or induce or endeavour to induce any of the Company's employees as at
          Completion to leave their position at the Company, whether or not that
          person would commit a breach of his contract by so leaving (save as a
          result of general recruitment advertising). In addition, as
          consideration for the Seller and Rank entering the TSA the Buyer
          undertakes to the Seller and Rank (each for the benefit of itself and
          as trustee for the benefit of each member of the Seller's Group) that
          the Buyer will not, and every member for the time being of the Buyer's
          Group will


                                    PAGE 94



          not, directly or indirectly, alone or jointly with any other person,
          and whether as shareholder, partner, director, principal, consultant,
          agent or in any other capacity for a period of 1 year from the date of
          Completion within the Restricted Territory and to the detriment of the
          Deluxe Group, solicit away from any member of the Deluxe Group
          (excluding the Company) any of its employees as at Completion or any
          other of its employees involved from time to time in the provision of
          services under the TSA or this Agreement to leave their position at
          the Deluxe Group, whether or not that person would commit a breach of
          his contract by so leaving (save as a result of general recruitment
          advertising).

3    For a period of 3 years from the date of Completion, the Seller shall not
     disclose or use any confidential information or trade secrets which belong
     to and relate exclusively to the Company or any of its customers or
     suppliers to the detriment of the Restricted Business. This paragraph shall
     not apply to -

     (A)  confidential information or trade secrets under a legal obligation
          involuntarily incurred or if required by the law of any relevant
          jurisdiction or by any competent regulatory or governmental body or
          securities exchange in any relevant jurisdiction, provided that in any
          such case, the Seller shall take all such steps as may be reasonable
          and practicable in the circumstances to consult with the Buyer before
          the relevant disclosure is made and shall take into account the
          Buyer's reasonable comments;

     (B)  any confidential information or trade secret which is or becomes part
          of the public domain without breach of this paragraph or paragraph 4;
          or

     (C)  confidential information or trade secrets disclosed to any other
          member of the Seller's Group or by any professional advisers of the
          Seller to any other member of the Seller's Group.


                                    PAGE 95



4    The Seller shall ensure that no member of the Seller's Group from time to
     time takes or omits to take any action which, if taken or omitted by the
     Seller, would constitute a breach of paragraph 2 or 3 and the Buyer shall
     ensure that no member of the Buyer's Group from time to time takes or omits
     to take any action which, if taken or omitted by the Buyer, would
     constitute a breach of paragraph 2.

5    Since the Seller has confidential information relating to the Company and a
     detailed awareness of the Company's customer connections, and since the
     purchase price payable for the Share has been calculated on the basis that
     the Seller would assume the obligations set out in this Schedule 7, the
     parties acknowledge that each of those obligations is reasonable as to
     subject matter, area and duration and is necessary to protect the Buyer's
     legitimate interest in the goodwill of the Company. The parties acknowledge
     that the obligations on the Buyer in this Schedule 7 are reasonable as to
     subject matter, area and duration and are necessary to protect the goodwill
     and interests of the Seller's Group.

6    Without prejudice to any other remedy which may be available to the Buyer,
     the parties agree that the Buyer and the Seller shall each be entitled to
     seek injunctive or other equitable relief in relation to any breach of
     paragraphs 2 and 3, it being acknowledged that an award of damages might
     not be an adequate remedy in the event of such a breach.

7    While the restrictions in this Schedule 7 are considered by the parties to
     be reasonable in all the circumstances it is agreed that if any provision
     of this Schedule 7 is found by any court of competent jurisdiction to go
     beyond what is reasonable in all the circumstances for the protection of
     the goodwill of the Company or of the Seller's Group, as relevant, but
     would be adjudged reasonable if any part of the wording of the provision
     were deleted, restricted or limited in a particular manner, the provision
     in question shall apply with such deletions, restrictions or limitations as
     may be necessary to make it valid.


                                    PAGE 96



8    Each of the Seller and the Buyer acknowledges that it has entered into this
     Agreement on an arm's length basis and that it has taken independent legal
     advice in so doing.

9    Each of the obligations assumed by the Seller and the Buyer in this
     Schedule 7 is separate and severable and shall be construed and be
     enforceable independently of the others, and is assumed without prejudice
     to any other obligation of the Seller or the Buyer implied at law or in
     equity.

                               PART 3 - EXEMPTION

10   Nothing contained in part 2 of this Schedule shall prevent any member of
     the Seller's Group or the Buyer's Group from -

     (A)  issuing any general recruitment advertising or employing any person
          whose employment with the Company or the Seller's Group is being or
          has been terminated; or

     (B)  acquiring and retaining any business or the shares or other securities
          of any undertaking if -

          (I)  not more than 15% of that business or that undertaking's business
               is a Restricted Business; and

          (II) the principal reason for doing so is not the acquisition of an
               interest in a Restricted Business.

11   For the avoidance of doubt nothing contained in this Schedule 7 shall apply
     to any company or business once it has ceased to be a member of, or owned
     by, a subsidiary undertaking of The Rank Group Plc.


                                    PAGE 97


                                   SCHEDULE 8

                          PRO FORMA COMPLETION ACCOUNTS



     (1)                               (2)                                           (3)
Account code                   Account description                  Included in Working Capital? (YES/NO)
- ------------                   -------------------                  -------------------------------------
                                                              
   103000      Fixed Assets Cost Control                                             NO
   104000      Fixed Assets Depreciation Control                                     NO

               FIXED ASSETS
   201100      Raw Material Stock                                                    YES
   201150      Provision Obsolete Raw Material Stock                                 YES
   201300      W.I.P. Stock                                                          YES
   201400      Finished Stock                                                        YES
   201500      Maintenance Stock                                                     YES
   201550      Provision Obsolete Maintenance Stock                                  YES
   201600      Printed Matter Stock                                                  YES
   201650      Provision Obsolete Printed Matter Stock                               YES
   201700      Goods In Transit                                                      YES
   202100      Thirds Trade Debtors                                                  YES
   202120      Bad Debt Provision Specific                                           YES
   202130      Debtor Credits                                                        YES
   202140      Sales Provision Control                                               YES
   202200      Intercompany Trade Debtors                                            NO
   202202      Intercompany Debtor Accrual                                           NO
   202303      Deferred Tax Others Provision                                         YES
   203100      Prepayments                                                           YES
   203150      Third Party Print Revenue Accrual,                                    YES
   204110      Petty Cash Sterling                                                   NO
   204120      Petty Cash Currency                                                   NO

               CURRENT ASSETS
   302100      Third Trade Creditor                                                  YES
   302102      Thirds Creditor Accl                                                  YES
   302103      PAYE/NIC Creditor                                                     YES
   302104      Pensions Creditor                                                     YES
   302105      Payroll Control                                                       YES
   302200      Intco Trade Creditor                                                  NO
   302202      Intco Creditor Accl                                                   NO
   302210      Interco Creditor Provision(items not on statement)                    NO
   302303      Vehicle Lease Creditor                                                NO
   302320      U-Select Lease Creditor,                                              NO
   302400      Corpor Tax Creditor                                                   NO
   303000      Accruals Control                                                      YES
   303940      Un Gain/loss Contra                                                   YES
   304900      Customs & Excise                                                      YES

               CURRENT LIABILITIES
   401000      Equity                                                                NO
   402000      Retained Earnings                                                     NO
   405900      Deluxe Loan Account Accrual                                           NO



                                     PAGE 98



                                                              
   408000      HSBC Sterling Account                                                 NO
   408010      HSBC US Dollar Account                                                NO
   408015      HSBC Euro Account                                                     NO
   408030      Rank Loan Account                                                     NO
   408040      Deluxe Media Services Loan Account                                    NO




                                     PAGE 99



                                   SCHEDULE 9

                          SCHEDULE OF ESTIMATED AMOUNTS

                                      
Intra Group Payables                     L  888,996
Intra Group Receivables                  L   80,179
Third Party Financial Debt               L    6,048
Estimated Working Capital                L6,666,667
Cash included in Initial Consideration   L        0




                                    PAGE 100



                                   SCHEDULE 10

                                   GUARANTEES

1    Guarantee of tenant covenants under the lease of buildings E, EZ, F and FZ
     contained in a Deed of Release and Substitution of New Guarantor dated 27th
     January 2004.

2    Guarantee in Universal manufacturing and supply agreement dated 28th March
     2002.


                                    PAGE 101




EXECUTED AND DELIVERED AS A DEED   )
of DGMS BLACKBURN HOLDINGS LIMITED )
acting by -                        ) -------------------------------------------
                                     Director


                                     -------------------------------------------
                                     Director/Secretary

EXECUTED AND DELIVERED AS A DEED   )
of EDC UK HOLDINGS LIMITED         )
acting by -                        ) -------------------------------------------
                                     Director


                                     -------------------------------------------
                                     Director/Secretary

EXECUTED AND DELIVERED AS A DEED   )
of ENTERTAINMENT DISTRIBUTION      )
COMPANY, LLC                       )
acting by -                        ) -------------------------------------------
                                     Director


                                     -------------------------------------------
                                     Director/Secretary

EXECUTED AND DELIVERED AS A DEED   )
of GLENAYRE ELECTRONICS, INC.      )
acting by -                        ) -------------------------------------------
                                     Director


                                     -------------------------------------------
                                     Director/Secretary

EXECUTED AND DELIVERED AS A DEED   )
of RANK LEISURE HOLDINGS LIMITED   )
acting by -                        ) -------------------------------------------
                                     Director


                                     -------------------------------------------
                                     Director/Secretary


                                    PAGE 102

EX-15.1

Exhibit 15.1

To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Atlanta, Georgia

     We are aware of the incorporation by reference in the Registration Statement Number 33-68766 on Form S-8 dated September 14, 1993 (amended by Post-Effective Amendment Number 1 on Form S-8 dated August 8, 2003), Registration Statement Number 333-04635 on Form S-8 dated May 28, 1996 (amended by Post-Effective Amendment Number 1 on Form S-8 dated May 22, 1998 and Post-Effective Amendment Number 2 on Form S-8 dated August 8, 2003), Registration Statement Number 333-38169 on Form S-8 dated October 17, 1997 (amended by Post-Effective Amendment Number 1 on Form S-8 dated August 8, 2003), Registration Statement Number 333-56375 on Form S-8 dated June 9, 1998, Registration Statement number 333-81161 on Form S-8 dated June 21, 1999 (amended by Post-Effective Amendment Number 1 on Form S-8 dated August 8, 2003), Registration Statement Number 333-81155 on Form S-8 dated June 21, 1999 (amended by Post-Effective Amendment Number 1 on Form S-8 dated August 8, 2003), Registration Statement number 333-37446 on Form S-8 dated May 19, 2000 (amended by Post-Effective Amendment Number 1 on Form S-8 dated August 8, 2003), Registration Statement Number 333-107786 on Form S-8 dated August 8, 2003, and Registration Statement Number 333-107789 on Form S-8 dated August 8, 2003, of our report dated August 9, 2006, relating to the unaudited condensed consolidated interim financial statements of Glenayre Technologies, Inc. and Subsidiaries which are included in its Form 10-Q for the quarter ended June 30, 2006.

/s/ Ernst & Young LLP

Atlanta, Georgia
August 9, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Clarke H. Bailey, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Glenayre Technologies, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2006
/s/ Clarke H. Bailey

Clarke H. Bailey
Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Debra Ziola, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Glenayre Technologies, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2006
/s/ Debra Ziola

Debra Ziola
Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Glenayre Technologies, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Clarke H. Bailey, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Clarke H. Bailey

Clarke H. Bailey
Chief Executive Officer
August 9, 2006

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Glenayre Technologies, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Debra Ziola, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Debra Ziola

Debra Ziola
Chief Financial Officer
August 9, 2006