EXHIBIT 13

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

The following  discussion is intended to assist the reader in understanding  and
evaluating  the  financial  condition  and  results  of  operations  of  Comdial
Corporation and its subsidiaries (the "Company").  This review should be read in
conjunction with the financial  statements and accompanying notes. This analysis
attempts  to identify  trends and  material  changes  that  occurred  during the
periods  presented.  Prior years have been  reclassified  to conform to the 1997
reporting basis (see Note 1 to the Consolidated Financial Statements).

RESULTS OF OPERATIONS

Selected  consolidated  statements of operations for the last three years are as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
December 31,
In thousands                                                      1997             1996              1995
----------------------------------------------------------------------------------------------------------
<S> <C>
    Net sales                                                  $118,561         $102,182           $94,729
    Gross profit                                                 47,343           37,881            30,702
    Selling, general & administrative                            29,069           25,757            19,225
    Engineering, research & development                           6,497            5,771             4,186
    Interest expense                                              1,698            1,626               996
    Goodwill amortization                                         3,567            2,674                23
    Miscellaneous expense - net                                     644              762               737
    Income before income taxes                                    5,868            1,291             5,535
    Income tax expense/(benefit)                                    149             (518)           (4,334)
    Net income                                                    5,719            1,809             9,869
    Dividends on preferred stock                                      -                -               350
    Net income applicable to common stock                         5,719            1,809             9,519
----------------------------------------------------------------------------------------------------------
</TABLE>
1997 Compared with 1996

Net sales as reported for 1997 increased by 16% to  $118,561,000,  compared with
$102,182,000  in 1996. The continued  increase in net sales was primarily due to
(1) greater  demand for the  Company's  Digital  Expandable  System  ("DXP") and
Digital  products,  (2) introduction of new products such as Impact SCS, the new
open digital switching  platform known as "the FX Series," and various other new
products,  and (3) continued growth in sales of Computer  Telephone  Integration
("CTI")  products  such as the Small Office  product  (voicemail  system).  This
product is produced by a subsidiary of the Company, Key Voice Technologies, Inc.
("KVT").

The  following  table  presents  certain  relevant  information  concerning  the
Company's principle product lines for the periods indicated:


<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
December 31,
In thousands                                                     1997             1996              1995
--------------------------------------------------------------------------------------------------------------
<S> <C>
    Business Systems
       Digital                                                  $50,387          $42,811           $40,486
       CTI                                                       26,971           20,458             7,338
       DXP                                                       25,527           17,750            13,835
       Analog                                                    12,117           16,206            22,426
                                                               --------         --------           -------
         Sub-total                                              115,002           97,225            84,085
    Proprietary and specialty terminals                           4,101            4,741             6,032
    Custom manufacturing                                            736            1,299             6,092
                                                               --------         --------           -------
         Gross sales                                            119,839          103,265            96,209
    Sales discount and allowances                                (1,278)          (1,083)           (1,480)
                                                               --------         --------           -------
         Net sales                                             $118,561         $102,182           $94,729
                                                               ========         ========           =======
------------------------------------------------------------------------------
</TABLE>

In 1997,  gross  sales of  digital  and DXP  products  increased  18% and 44% to
$50,387,000 and $25,527,000  compared with $42,811,000 and $17,750,000 for 1996,
respectively.  In 1997, gross sales of CTI products, including voice processing,
increased 32% to  $26,971,000  compared with  $20,458,000  for 1996.  Management
expects sales of digital  business systems to continue to grow in 1998 primarily
due to (1)  continued  growth in digital  systems and CTI sales sold directly to
end  users,  (2)  development  of new  products  and new  distribution  channels
offering  integrated CTI solutions,  and (3) growth of product sales to original
equipment  manufacturing ("OEM") customers such as the agreement the Company has
with Harris  Corporation.  In 1997, gross sales of analog products,  proprietary
terminals, and custom manufacturing revenue decreased 25% to $12,117,000, 13% to
$4,101,000,  and  43% to  $736,000,  respectively,  compared  with  $16,206,000,
$4,741,000, and $1,299,000,  respectively, for 1996. Management expects sales of
analog and proprietary terminals to continue to decrease in 1998.

In 1997,  international  sales  increased  by 15% to  $4,220,000  compared  with
$3,670,000 for 1996. The growth in international sales was less than anticipated
primarily due to  distribution  and  homologation  issues.  Homologation  is the
process of securing regulatory, safety, and network compliance approvals for the
sale of  telecommunications  equipment in foreign  countries.  As many countries
have  different  standards  than the  United  States,  this  typically  involves
engineering   modifications  and  compliance   testing.   As  the  international
distributors  gain more  experience with the Company's  products,  international
sales are expected to continue to grow.

Gross profit,  as a percentage of sales for 1997,  was 40% compared with 37% for
1996.  In 1997,  gross profit  increased  by 25% to  $47,343,000  compared  with
$37,881,000  for 1996.  This  increase was primarily  attributable  to increased
sales of higher margin business system products, such as DXP and CTI products.

Selling,  general  and  administrative  expenses  increased  in  1997  by 13% to
$29,069,000  compared with  $25,757,000  for 1996.  The primary  reasons for the
increase were (1) additional  administrative,  marketing,  and sales expenses of
$966,000  associated with KVT, (2) an increase in sales personnel to support the
growth in  national  accounts  and  expanding  CTI  markets,  (3) an increase in
administrative  costs  associated with hiring two new officers,  one of whom was
hired at the end of the second  quarter of 1997 and the other in December  1997,
and (4) higher  promotional  allowance  costs  associated  with increased  sales
through Platinum and Preferred Dealers.

Engineering,  research  and  development  expenses  increased  in 1997 by 13% to
$6,497,000 compared with $5,771,000 for 1996. This increase was primarily due to
increased expenses of $442,000 associated with KVT.

Interest expense increased in 1997 by 4% to $1,698,000  compared with $1,626,000
for 1996.  This  increase was  primarily  due to the 1996  acquisition  loan the
Company obtained from Fleet Capital Corporation  ("Fleet") to provide funding to
acquire Aurora Systems,  Inc.  ("Aurora") and KVT. In 1996, there were only nine
months of  interest  expense  associated  with the Aurora and KVT  acquisitions.
Additional interest expense was incurred as a result of a promissory note issued
to the original  owners of KVT related to the purchase of KVT (see Note 2 to the
Consolidated  Financial  Statements).  The interest expense  associated with the
1996  acquisitions  will  decline in 1998 as the Company  continues  to pay down
these loans.

Goodwill  amortization  expense increased in 1997 by 33% to $3,567,000  compared
with  $2,674,000  in 1996.  The increase was due to a full year of  amortization
expense  associated with the acquisitions of Aurora and KVT and the write-off of
the remaining goodwill of $164,000 associated with an earlier acquisition.

Net income before income taxes, as a result of the foregoing,  increased in 1997
by  355%  to  $5,868,000   compared  with  $1,291,000  in  1996.  Major  factors
contributing  to the  increase  in income and  earnings  per share for 1997 were
increased sales of business systems with higher margins. Management anticipates,
assuming continued strength in the economy, that the factors,  which have led to
significant  increases  in sales  for 1997,  will  continue  to have a  positive
influence on the Company's performance in 1998.

Income tax expense  (benefit)  reflects an expense in 1997 of $149,000  compared
with a benefit of $518,000  for 1996.  This change was due to  recognition  of a
deferred  tax asset  benefit of  $219,000  for 1997  compared  with a benefit of
$736,000 for 1996. The tax benefits,  recognized in 1997 and 1996, were a result
of a reduction in the valuation  allowance relating to the Company's federal net
operating loss carryforwards  ("NOLS") (see Note 7 to the Consolidated Financial
Statements).  The Company  periodically reviews the requirements for a valuation
allowance and makes  adjustments to such allowance when changes in circumstances
result in changes in  judgment  about the future  realization  of  deferred  tax
assets.  Based on a continual  re-evaluation  of the realization of the deferred
tax asset, the valuation allowance was reduced and a tax benefit of $219,000 was
recognized in the quarter ended March 30, 1997.

Tax expense for 1997 increased to $368,000 compared with $218,000 for 1996. This
increase is due to the higher taxable income for 1997 versus 1996.

1996 Compared with 1995

Net sales as reported for 1996  increased by 8% to  $102,182,000,  compared with
$94,729,000  in 1995.  The increase in net sales was primarily due to (1) demand
for the  Company's  DXP and  Digital  products,  and (2)  growth in sales of CTI
products,  which was  enhanced by the  acquisitions  of Aurora and KVT. In 1996,
gross  sales  of  DXP  products  increased  28%  to  $17,750,000  compared  with
$13,835,000  for 1995.  In 1996,  gross sales of CTI products,  including  voice
processing,  increased 179% to $20,458,000 compared with $7,338,000 for 1995. In
1996, sales of analog products,  proprietary terminals, and custom manufacturing
revenue decreased 28% to $16,206,000,  21% to $4,741,000, and 79% to $1,299,000,
respectively,   compared   with   $22,426,000,   $6,032,000,   and   $6,092,000,
respectively,  for 1995. The custom manufacturing  decrease was primarily due to
completion  in 1995 of a  one-time  contract  with a major  customer.  In  1996,
international  sales increased by 38% to $3,670,000 compared with $2,666,000 for
1995.

Gross profit,  as a percentage of sales for 1996, was approximately 37% compared
with 32% for  1995.  In  1996,  gross  profit  increased  by 23% to  $37,881,000
compared with $30,702,000 for 1995. This increase was primarily  attributable to
increased sales of higher margin business system  products,  such as DXP and CTI
products, and higher margins that Aurora and KVT products added to the business.

Selling,  general  and  administrative  expenses  increased  in  1996  by 34% to
$25,757,000  compared with  $19,225,000  for 1995.  The primary  reasons for the
increase  were (1) an  increase  in sales  personnel  to broaden  the  Company's
domestic network and to support the growth of the CTI and international markets,
(2)  additional  administrative,  marketing,  and sales  expenses of  $2,940,000
associated  with  Aurora and KVT,  and (3) higher  promotional  allowance  costs
associated with increased sales through Preferred Dealers.

Engineering,  research  and  development  expenses  increased  in 1996 by 38% to
$5,771,000 compared with $4,186,000 for 1995. This increase was primarily due to
(1) the addition of new software  development  and support  personnel to further
the development of new products,  develop new CTI applications,  and shorten the
development cycle, and (2) increased expenses of $895,000 associated with Aurora
and KVT.

Interest expense  increased in 1996 by 63% to $1,626,000  compared with $996,000
for 1995.  This increase was due to the  acquisition  loan the Company  obtained
from  Fleet to  provide  funding  to help  acquire  Aurora  and KVT.  Additional
interest  expense was also  incurred as a result of a promissory  note issued to
the original owners of KVT related to of the purchase of KVT.

Goodwill  amortization  expense in 1996  increased to  $2,674,000  compared with
$23,000 in 1995. The increase was due to the acquisitions of Aurora and KVT.

Net income before income taxes, as a result of the foregoing,  decreased in 1996
by 77% to $1,291,000 compared with $5,535,000 in 1995. Some of the factors which
led to the  decreases  in  income  and  earnings  per  share  for 1996  were (1)
decreased  sales of analog  products which were down by  approximately  27%, (2)
decreased sales to the Federal  Government which were down by approximately 53%,
and (3) additional  costs  associated  with expanding the sales and  engineering
organizations.

Income tax expense  (benefit)  reflected a benefit of $518,000 in 1996  compared
with a benefit of $4,334,000  for 1995.  This change was due to recognition of a
deferred tax asset through a reduction of the valuation  allowance for both 1996
and 1995. Based on a continual  re-evaluation of the realization of the deferred
tax asset, the valuation allowance was reduced and a tax benefit of $736,000 was
recognized in the quarter ended March 31, 1996.

Dividends on preferred stock were zero for 1996 compared with $350,000 for 1995.
In  1995,  all of the  outstanding  shares  of the  Company's  Series  A  7-1/2%
Cumulative  Convertible  Redeemable Preferred Stock ("Series A Preferred Stock")
were redeemed.



<PAGE>


LIQUIDITY AND CAPITAL SOURCES

The Company's  financial position continues to improve when compared to previous
years. In 1997, the Company's cash flow provided by operations increased by 118%
to $12,240,000  compared with  $5,626,000 for 1996.  This increase was primarily
attributable  to  increased  sales  for  1997.  This  continued  improvement  in
financial  position  allows the Company to make necessary and desirable  capital
expenditures   and  to   expand   into   new   high   growth   markets   in  the
telecommunications industry.

The following table sets forth the Company's cash and cash equivalents,  current
maturities on debt, and working capital at the dates indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
December 31,
In thousands                                                      1997             1996             1995 
----------------------------------------------------------------------------------------------------------------
<S> <C>
     Cash and cash equivalents                                   $5,673             $180           $4,144
     Current maturities on debt                                   3,701            5,343            1,903
     Working capital                                             16,676           10,608           18,271
----------------------------------------------------------------------------------------------------------------
</TABLE>
All operating cash  requirements  are funded  through a $12.5 million  revolving
credit  facility  provided  by Fleet and any excess cash is put into short term,
highly liquid  investments.  The Company  reports the revolving  credit facility
activity  on a net  basis on the  Consolidated  Statements  of Cash  Flows.  The
Company considers outstanding checks to be a bank overdraft.  As of December 31,
1997, the Company's cash and cash equivalents were higher by $5,493,000,  due to
significantly improved operating performance.  Management anticipates using some
of the available  cash to help lower the Company's  existing  debt,  which would
result in lower interest expense for future periods.


Working  capital at December 31, 1997,  increased by $6,068,000 when compared to
1996.  This  increase  was  primarily  due to the  additional  cash the  Company
generated from operations for 1997.

Capital additions for 1997 were approximately $3,922,000. Such capital additions
helped the Company  introduce new products as well as improve quality and reduce
costs associated with new and existing  products.  Capital additions were funded
by cash generated from  operations and borrowing from Fleet.  Cash  expenditures
for  capital  additions  for  1997,  1996,  and  1995  amounted  to  $3,609,000,
$3,179,000,   and  $2,155,000,   respectively.   Management   anticipates   that
approximately  $5,000,000 will be spent on capital  additions during 1998. These
additions  will  help the  Company  meet its  commitments  to its  customers  by
developing new products for the future.  The Company plans to fund all additions
primarily  through cash generated by operations  with some of the funding coming
from borrowing and long-term leases.

The Company has a  commitment  from  Crestar Bank for the issuance of letters of
credit in an  aggregate  amount  not to  exceed  $500,000  at any one  time.  At
December 31, 1997, the amount of commitments under the letter of credit facility
with Crestar Bank was $52,000.

Accounts Receivable at December 31, 1997,  increased by $1,618,000 primarily due
to the increased sales in the latter part of the fourth quarter of 1997. Prepaid
expenses and other  current  assets at December 31, 1997,  increased by $328,000
primarily due to the  receivable  associated  with Aurora's sale of the FastCall
product  to  Spanlink  Communications,  Inc.  (see  Note 2 to  the  Consolidated
Financial  Statements).  Goodwill at December 31, 1997,  decreased by $3,710,000
compared with December 31, 1996.  This decrease was due to the  amortization  of
costs  associated  with the  acquisitions of Aurora and KVT and the write-off of
goodwill costs associated with the sale of the Fastcall product.

Other accrued liabilities at December 31, 1997, increased by $1,084,000 compared
with December 31, 1996. This increase was primarily due to liabilities  relating
to 1997 sales commissions and income incentives.

Long-term Debt, Including Current Maturities

As  of  February  1,  1994,  Fleet  held  substantially  all  of  the  Company's
indebtedness.  The Company and Fleet entered into a loan and security  agreement
("Loan  Agreement")  in 1994 pursuant to which Fleet provided the Company with a
$6.0 million term loan  represented by a note ("Term Note I") and a $9.0 million
revolving  credit loan facility  ("Revolver") in an aggregate amount up to $14.0
million

On March 13, 1996,  the Company and Fleet amended the Loan  Agreement to provide
the Company with a $10.0 million  acquisition loan ("Acquisition  Loan"), a $3.5
million equipment loan ("Equipment  Loan"), and a $12.5 million revolving credit
loan facility ("Amended Revolver"). On March 20, 1996, the Company borrowed $8.5
million under the  Acquisition  Loan,  which was used,  in  connection  with the
purchase of KVT and Aurora. In addition to the Fleet  indebtedness,  the Company
issued a  promissory  note  ("Promissory  Note") for $7.0  million to the former
owners of KVT, as part of the purchase price.

From time to time,  the Company and Fleet have  amended the Loan  Agreement.  On
February 5, 1997,  the Company  borrowed an  additional  $1.9 million  under the
Equipment Loan  ("Equipment  Loan II") which was used to purchase  surface mount
technology  ("SMT") equipment to further expand its SMT line capacity.  On March
27, 1997,  the Company and Fleet  amended the Loan  Agreement to modify  certain
financial covenants.

Current  maturities  on debt at December  31, 1997,  decreased by $1.6  million,
primarily due to the Amended Revolver,  which the Company currently is not using
due to excess cash. Availability under the Amended Revolver is based on eligible
accounts receivable and inventory,  less funds already borrowed.  As of December
31, 1997, the Company had paid all the borrowed funds under the Amended Revolver
and had approximately $8.5 million of borrowing capacity. The Company expects to
fund its 1998 total debt  payments of $2.2 million to Fleet with cash  generated
from operations.  See Note 6 to the Company's  Consolidated Financial Statements
for  additional  information  with  respect to the  Company's  loan  agreements,
long-term debt and available short-term credit lines.

The Company believes that income from operations combined with amounts available
from the  Company's  current  credit  facilities  will be sufficient to meet the
Company's needs for the foreseeable future.

Other Financial Information

During fiscal years 1997, 1996, and 1995,  primarily all of the Company's sales,
net   income,   and   identifiable   net  assets   were   attributable   to  the
telecommunications industry.

In October 1995,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation."  The new  standard  defines a fair  value  method of
accounting for stock options and similar equity instruments. Pursuant to the new
standard,  companies  can either  adopt the  standard or continue to account for
such  transactions  under  Accounting  Principles  Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." The Company has continued to account
for such transactions under APB No. 25. The Company has disclosed,  in a note to
the financial statements, pro forma net income and earnings per share, as if the
Company  had  applied  the  new  method  of  accounting  (see  Note  11  to  the
Consolidated Financial Statements). Since the Company has continued to apply APB
No.  25,  complying  with the  standard  has had no  effect on  earnings  or the
Company's cash flow.

In February 1997,  FASB issued SFAS No. 131,  "Disclosures  About Segments of an
Enterprise  and Related  Information."  The new standard  requires  presentation
disclosures about reportable  operating segments of the Company.  This statement
will be effective for the Company's  1998 fiscal year.  This new  requirement is
being  discussed by management to determine how best to meet this new disclosure
requirement.

In June 1997, FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income." The
new  standard  requires  businesses  to  disclose  comprehensive  income and its
components in their general-purpose financial statements. This statement will be
effective  for the  Company's  1998 fiscal year.  This standard will not have an
impact on the Company's disclosures.

In early 1997, the Company  established a team of people,  to evaluate  whether,
and to what extent, the Year 2000 would impact the Company's business.  The Year
2000 Team identified which of the Company's products,  devices, and computerized
systems that contain  embedded  microprocessors,  that  require  remediation  or
replacement  because  of  potential  Year  2000  problems.  The Year  2000  Team
concluded  that  nearly all of the  Company's  products  are  already  Year 2000
compliant  and those which are not will be  compliant  by 1999 or before.  On an
ongoing  basis,  the  Company  has been  replacing  existing  systems to improve
efficiency and to address the Year 2000 problem. Such replacements are projected
to be  complete  in 1998.  The  Company  does not  expect  to make any  material
expenditures solely to address Year 2000 issues.

Management  believes  that the  Company  is  properly  addressing  the Year 2000
problem in order to  mitigate  any adverse  operational  or  financial  impacts.
Furthermore, the Company plans to implement a requirement beginning in 1998 that
its suppliers certify that all products and services provided to the Company are
Year 2000 compliant.

"SAFE HABOR"  STATEMENT UNDER THE PRIVATE  SECURITIES  LIGITATION  REFORM ACT OF
1995

The Company's Annual Report may contain some forward-looking statements that are
subject to risks and uncertainties, including, but not limited to, the impact of
competitive  products,  product demand and market acceptance risks,  reliance on
key  strategic   alliances,   fluctuations  in  operating  results,   delays  in
development  of highly complex  products,  and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission. These
risks could  cause the  Company's  actual  results for 1998 and beyond to differ
materially from those expressed in any forward-looking  statement made by, or on
behalf of, the Company.



<PAGE>

------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
------------------------------------------------------------------------------



Board of Directors and Stockholders
Comdial Corporation
Charlottesville, Virginia


We  have  audited  the  accompanying  consolidated  balance  sheets  of  Comdial
Corporation  and its  subsidiaries  (the  "Company") as of December 31, 1997 and
1996,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1997.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material   respects,   the  financial   position  of  Comdial   Corporation  and
subsidiaries at December 31, 1997 and 1996, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1997 in conformity with generally accepted accounting principles.



/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
January 30, 1998

<PAGE>


------------------------------------------------------------------------------
REPORT OF MANAGEMENT
------------------------------------------------------------------------------

Comdial   Corporation's   management  is  responsible   for  the  integrity  and
objectivity  of  all  financial  data  included  in  this  Annual  Report.   The
consolidated   financial  statements  have  been  prepared  in  accordance  with
generally accepted accounting principles.  Such principles are consistent in all
material  respects  with  accounting   principles   prescribed  by  the  various
regulatory  commissions.  The financial data includes  amounts that are based on
the best estimates and judgments of management.

The Company  maintains  an  accounting  system and related  internal  accounting
controls  designed to provide  reasonable  assurance that assets are safeguarded
against loss or unauthorized use and that the financial records are adequate and
can be relied upon to produce financial  statements in accordance with generally
accepted  accounting  principles.   Deloitte  &  Touche  LLP,  Certified  Public
Accountants ("Independent Auditors"),  have audited these consolidated financial
statements, and have expressed herein their unqualified opinion.

The Company diligently strives to select qualified managers, provide appropriate
division of  responsibility,  and assure that its  policies  and  standards  are
understood throughout the organization.  The Company's Code of Conduct serves as
a guide for all  employees  with  respect to business  conduct and  conflicts of
interest.

The Audit  Committee of the Board of  Directors,  comprised of Directors who are
not employees,  meets periodically with management and the Independent  Auditors
to  review  matters  relating  to the  Company's  annual  financial  statements,
internal  accounting  controls,  and other accounting  services  provided by the
Independent Auditors.


/s/ William G. Mustain                                /s/ Christian L. Becken
William G. Mustain                                    Christian L. Becken
Chairman, President and                               Senior Vice President and
Chief Executive Officer                               Chief Financial Officer


<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                                                    December 31,
In thousands except par value                                                                 1997               1996
------------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C>
    Current assets
       Cash and cash equivalents                                                                   $5,673                $180
       Accounts receivable - net                                                                   11,278               9,660
       Inventories                                                                                 18,487              19,586
       Prepaid expenses and other current assets                                                    1,669               1,341
------------------------------------------------------------------------------------------------------------------------------
          Total current assets                                                                     37,107              30,767
------------------------------------------------------------------------------------------------------------------------------

    Property - net                                                                                 16,334              15,317
    Net deferred tax asset                                                                          8,164               7,469
    Goodwill                                                                                       13,142              16,852
    Other assets                                                                                    4,517               3,947
------------------------------------------------------------------------------------------------------------------------------
          Total assets                                                                            $79,264             $74,352
==============================================================================================================================

Liabilities and Stockholders' Equity
    Current liabilities
       Accounts payable                                                                            $9,229              $8,144
       Accrued payroll and related expenses                                                         2,659               2,926
       Accrued promotional allowances                                                               1,915               1,903
       Other accrued liabilities                                                                    2,927               1,843
       Current maturities of debt                                                                   3,701               5,343
------------------------------------------------------------------------------------------------------------------------------
          Total current liabilities                                                                20,431              20,159
------------------------------------------------------------------------------------------------------------------------------

    Long-term debt                                                                                  9,922              11,713
    Net deferred tax liability                                                                      2,705               2,230
    Long-term employee benefit obligations                                                          1,371               1,686
    Commitments and contingent liabilities (see Note 12)                                                -                   -
------------------------------------------------------------------------------------------------------------------------------
          Total liabilities                                                                        34,429              35,788
------------------------------------------------------------------------------------------------------------------------------

    Stockholders' equity
       Common stock ($0.01 par value) and paid-in capital
          (Authorized 30,000 shares; issued shares:
           1997 = 8,697; 1996 = 8,580)                                                            114,663             114,118
       Other                                                                                       (1,039)             (1,046)
       Accumulated deficit                                                                        (68,789)            (74,508)
------------------------------------------------------------------------------------------------------------------------------
          Total stockholders' equity                                                               44,835              38,564
------------------------------------------------------------------------------------------------------------------------------
          Total liabilities and stockholders' equity                                              $79,264             $74,352
==============================================================================================================================


The accompanying notes are an integral part of these financial statements.

<PAGE>
Consolidated Statements of Operations
<CAPTION>

------------------------------------------------------------------------------------------------------------------
                                                                                 Years Ended December 31,
In thousands except per share amounts                                        1997           1996           1995
------------------------------------------------------------------------------------------------------------------


Net sales                                                                  $118,561       $102,182        $94,729
Cost of goods sold                                                           71,218         64,301         64,027
------------------------------------------------------------------------------------------------------------------
        Gross profit                                                         47,343         37,881         30,702
------------------------------------------------------------------------------------------------------------------

Operating expenses
    Selling, general & administrative                                        29,069         25,757         19,225
    Engineering, research & development                                       6,497          5,771          4,186
------------------------------------------------------------------------------------------------------------------
        Operating income                                                     11,777          6,353          7,291
------------------------------------------------------------------------------------------------------------------

Other expense
    Interest expense                                                          1,698          1,626            996
    Goodwill amortization                                                     3,567          2,674             23
    Miscellaneous expense - net                                                 644            762            737
------------------------------------------------------------------------------------------------------------------
Income before income taxes                                                    5,868          1,291          5,535
Income tax expense/(benefit)                                                    149           (518)        (4,334)
------------------------------------------------------------------------------------------------------------------
        Net income                                                            5,719          1,809          9,869
Dividends on preferred stock                                                      -              -            350
------------------------------------------------------------------------------------------------------------------
        Net income applicable to common stock                                $5,719         $1,809         $9,519
==================================================================================================================

Earnings per common share and common
    equivalent share:
        Basic                                                                 $0.66          $0.21          $1.27
==================================================================================================================

        Diluted                                                               $0.65          $0.21          $1.20
==================================================================================================================

Weighted average common shares outstanding:
        Basic                                                                 8,684          8,484          7,466
        Diluted                                                               8,767          8,668          8,210

                   The accompanying notes are an integral part of these financial statements.
<PAGE>
Consolidated Statements of Stockholders' Equity

------------------------------------------------------------------------------------------------------------------


                                                        Common Stock          Preferred Stock    
                                                   ----------------------------------------------        Paid-in
In thousands                                             Shares     Amount   Shares       Amount         Capital
------------------------------------------------------------------------------------------------------------------
 Balance at January 1, 1995                              21,207       $211      750       $7,500         $100,109
     Reverse stock-split 1 for 3
         (August 8, 1995)                               (14,138)      (141)                                   141
     Proceeds from sale of
        Common Stock:
        Stock offering                                    1,000         10                                 11,200
        Notes receivable
        Stock options exercised                             144          2                                    250
     Stock offering cost                                                                                     (273)
     Incentive stock issued                                  13                                               116
     Redeemed preferred stock                                                  (750)      (7,500)
     Treasury stock purchased
     Dividend paid on preferred stock
 Net income
------------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1995                             8,226         82        -            -          111,543
     Proceeds from sale of
        Common Stock:
        Notes receivable
        Stock options exercised                              53          1                                     82
     Stock offering cost                                                                                      (26)
     Incentive stock issued                                   8                                                73
     Treasury stock purchased
     Common stock issued for acquisitions
        Key Voice Tech., Inc. ("KVT")                       243          2                                  1,469
        Aurora Systems, Inc. ("Aurora")                     148          2                                    890
 Net income
------------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1996                             8,678         87        -            -          114,031
     Proceeds from sale of
        Common Stock:
        Notes receivable
        Stock options exercised                              32                                               165
     Stock offering cost                                                                                       (9)
     Deferred stock compensation                                                                                4
     Incentive stock issued                                  12                                                97
     Contingency stock issued for
        KVT acquisition                                      72          1                                    291
     Acquisition costs for KVT and Aurora                                                                      (4)
 Net income
------------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1997                             8,794        $88        -            -         $114,575
==================================================================================================================



                                                                                Notes
                                                                              Receivable
                                                       Treasury Stock          on Sale        Retained
                                                   -----------------------
In thousands                                          Shares       Amount      of Stock       Earnings          Total
-----------------------------------------------------------------------------------------------------------------------
 Balance at January 1, 1995                             (254)       ($760)      ($182)        ($85,835)        $21,043
     Reverse stock-split 1 for 3
         (August 8, 1995)                                169
     Proceeds from sale of                                                                                           -
        Common Stock:                                                                                                -
        Stock offering                                                                                          11,210
        Notes receivable                                                            6                                6
        Stock options exercised                                                                                    252
     Stock offering cost                                                                                          (273)
     Incentive stock issued                                                                         (1)            115
     Redeemed preferred stock                                                                                   (7,500)
     Treasury stock purchased                             (9)         (78)                                         (78)
     Dividend paid on preferred stock                                                             (350)           (350)
 Net income                                                                                      9,869           9,869
-----------------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1995                            (94)        (838)       (176)         (76,317)         34,294
     Proceeds from sale of
        Common Stock:
        Notes receivable                                                            8                                8
        Stock options exercised                                                                                     83
     Stock offering cost                                                                                           (26)
     Incentive stock issued                                                                                         73
     Treasury stock purchased                             (3)         (40)                                         (40)
     Common stock issued for acquisitions
        Key Voice Tech., Inc. ("KVT")                                                                            1,471
        Aurora Systems, Inc. ("Aurora")                                                                            892
 Net income                                                                                      1,809           1,809
-----------------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1996                            (97)        (878)       (168)         (74,508)         38,564
     Proceeds from sale of
        Common Stock:
        Notes receivable                                                            7                                7
        Stock options exercised                                                                                    165
     Stock offering cost                                                                                            (9)
     Deferred stock compensation                                                                                     4
     Incentive stock issued                                                                                         97
     Contingency stock issued for
        KVT acquisition                                                                                            292
     Acquisition costs for KVT and Aurora                                                                           (4)
 Net income                                                                                      5,719           5,719
-----------------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1997                            (97)       ($878)      ($161)        ($68,789)        $44,835
=======================================================================================================================


                   The accompanying notes are an integral part of these financial statements.



<PAGE>
Consolidated Statements of Cash Flows
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                               Years Ended December 31,
In thousands                                                                            1997              1996            1995
---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
    Cash received from customers                                                       $121,199         $106,979         $97,156
    Other cash received                                                                   1,219            1,022           1,355
    Interest received                                                                        19               53              60
    Cash paid to suppliers and employees                                               (108,304)        (101,220)        (93,990)
    Interest paid on debt                                                                (1,565)            (876)           (676)
    Interest paid under capital lease obligations                                           (18)             (89)           (174)
    Income taxes paid                                                                      (310)            (243)           (186)
---------------------------------------------------------------------------------------------------------------------------------
       Net cash provided by operating activities                                         12,240            5,626           3,545
---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
    Purchase of Key Voice Technologies ("KVT")                                                -           (8,528)              -
    Purchase of Aurora Systems ("Aurora")                                                     -           (1,901)              -
    Acquisition cost for KVT and Aurora                                                      (4)            (934)              -
    Proceeds from the sale of equipment                                                      22                9               6
    Capital expenditures                                                                 (3,609)          (3,179)         (2,155)
---------------------------------------------------------------------------------------------------------------------------------
       Net cash used by investing activities                                             (3,591)         (14,533)         (2,149)
---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
    Proceeds from borrowings                                                              2,216            5,619               -
    Net borrowings under revolver agreement                                              (1,749)           1,749               -
    Proceeds from issuance of common stock                                                  162               47          11,384
    Principal payments on debt                                                           (3,693)          (1,941)         (1,824)
    Principal payments under capital lease obligations                                      (92)            (531)           (641)
    Preferred stock redemption                                                                -                -          (7,500)
    Preferred dividends paid                                                                  -                -            (350)
---------------------------------------------------------------------------------------------------------------------------------
       Net cash provided (used) by financing activities                                  (3,156)           4,943           1,069
---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                      5,493           (3,964)          2,465
---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year                                              180            4,144           1,679
---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                                 $5,673             $180          $4,144
=================================================================================================================================
Reconciliation of net income to net cash provided by operating activities:
 Net Income                                                                              $5,719           $1,809          $9,869
---------------------------------------------------------------------------------------------------------------------------------
    Depreciation and amortization                                                         8,634            6,680           3,557
    Change in assets and liabilities (for 1996,  net
       of effects from the purchase of KVT and Aurora):
    Decrease (increase) in accounts receivable                                           (1,618)             143          (2,339)
    Inventory provision                                                                   1,509            1,029           1,309
    Increase in inventory                                                                  (410)          (2,385)         (2,365)
    Increase in other assets                                                             (2,956)          (1,888)         (3,277)
    Increase in net deferred tax assets                                                    (220)            (736)         (4,503)
    Increase (decrease) in accounts payable and
       bank overdrafts                                                                    1,085             (657)          1,011
    Increase in other liabilities                                                           399              595             435
    KVT asset value at acquisition                                                            -            1,105               -
    Aurora asset value at acquisition                                                         -             (121)              -
    Increase (decrease) in other equity                                                      98               52            (152)
---------------------------------------------------------------------------------------------------------------------------------
       Total adjustments                                                                  6,521            3,817          (6,324)
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                               $12,240           $5,626          $3,545
=================================================================================================================================

                           The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>

Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1996, 1995

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The  consolidated   financial   statements   include  the  accounts  of  Comdial
Corporation and its subsidiaries (the "Company").  All significant  intercompany
accounts and transactions have been eliminated.

Nature of Operations

Comdial is a United States ("U.S.") based manufacturer of business communication
systems.  The Company's principal customers are small to medium sized businesses
throughout the U.S. and certain international  markets. The distribution network
consists  of  three  major  distributors,  other  supply  houses,  dealers,  and
independent  interconnects.  The dynamic,  high technology industry in which the
Company  participates  is very  competitive.  There is an increasing  shift from
analog to digital  product  lines as well as other rapid  technological  changes
creating the potential for product obsolescence.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial  statements in conformity  with Generally  Accepted
Accounting Principles ("GAAP") requires management to make certain estimates and
assumptions  that  affect  reported  amounts of assets,  liabilities,  revenues,
expenses,  and disclosure of contingent  assets and  liabilities at December 31,
1997.
Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash equivalents are defined as short-term  liquid  investments with maturities,
when  purchased,  of less than 90 days that are readily  convertible  into cash.
Under  the  Company's  current  cash  management  policy,  borrowings  from  the
revolving credit facility are used for normal operating purposes.  The revolving
credit facility is reduced by cash receipts that are deposited daily. Currently,
the Company has generated  from  operations  additional  cash over and above the
required amount to completely  fund the revolving  credit facility (see Note 6).
Bank overdrafts of $1,904,000 and $1,935,000 are included in accounts payable at
December 31, 1997 and 1996, respectively. Bank overdrafts are outstanding checks
that have not (1) cleared the bank or (2) been  funded by the  revolving  credit
facility.  The Company is reporting the revolving credit facility  activity on a
net basis on the Consolidated Statements of Cash Flows.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market.



<PAGE>


Property/Depreciation

Depreciation is computed using the straight-line method for all buildings,  land
improvements, machinery and equipment, and capitalized lease property over their
estimated useful lives. Expenditures for maintenance and repairs of property are
charged to expense.  Improvements  and renewals which extend  economic lives are
capitalized.

The estimated useful lives are as follows:
       Buildings                                                30 years
       Land Improvements                                        15 years
       Machinery and Equipment                                   7 years
       Computer Hardware Equipment and Tooling                   5 years

Expensing of Costs

All production  start-up,  research and development,  and engineering  costs are
charged to expense,  except for that  portion of costs  which  relate to product
software development and outside contract development (see "Capitalized Software
Development Costs").

Earnings per Common Share and Common Equivalent Share

For 1997,  1996,  and 1995,  earnings per common share ("EPS") were computed for
both  basic  and  diluted  EPS to  conform  to the new  Statement  of  Financial
Accounting  Standards  ("SFAS") No. 128. Basic EPS for all years  presented were
computed by dividing  net income  applicable  to common  shares by the  weighted
average  number  of common  shares  outstanding  and  common  equivalent  shares
including  any  possible  contingent  shares.  For 1997 and 1996,  there were no
preferred stock dividends paid or earned.  For 1997, 1996, and 1995, diluted EPS
were computed by dividing income attributable to common shareholders (net income
plus preferred stock  dividends  paid) by the weighted  average number of common
and common equivalent shares  outstanding  during the period plus (in periods in
which  they had a dilutive  effect)  the  effect of common  shares  contingently
issuable,  primarily from stock  options.  Diluted EPS assumes the conversion of
preferred stock and adds back the preferred stock dividends paid to net income.

Capitalized Software Development Costs

In 1997,  1996, and 1995, the Company incurred costs associated with development
of software related to the Company's various  products.  The accounting for such
software  costs is in  accordance  with SFAS No. 86. The  Company's  estimate of
product  life is  approximately  three  years  or  more.  The  total  amount  of
unamortized software development cost included in other assets is $3,068,000 and
$2,297,000 at December 31, 1997 and 1996, respectively.  The amounts capitalized
were $1,956,000,  $1,577,000,  and $840,000, of which $1,018,000,  $877,000, and
$757,000 were amortized in 1997, 1996, and 1995, respectively.  The Company also
capitalized  costs  associated with product  software  development  performed by
outside  contract  engineers.  The total amount of unamortized  outside contract
development  cost  included in other assets is $949,000 and $988,000 at December
31,  1997 and 1996,  respectively.  The  amount  capitalized  was  $530,000  and
$1,145,000,  of which  $569,000  and  $157,000  was  amortized in 1997 and 1996,
respectively.  For the year 1995 there was no capitalized  costs or amortization
expense that related to outside contract development cost.


<PAGE>


Postretirement Benefits Other Than Pension

The Company  accrued  estimated costs relating to health care and life insurance
benefits.  In 1997, 1996, and 1995, the Company expensed $64,000,  $41,000,  and
$311,000, respectively.

Income Taxes

The Company uses the deferred tax liability or asset approach, which is based on
the  difference  between  the  financial  statement  and tax basis of assets and
liabilities  as  measured  by the enacted tax rates which will be in effect when
the  differences  reverse.  Deferred tax expense is the result of changes in the
liability for deferred taxes. The measurement of deferred tax assets is impacted
by the  amount of any tax  benefits  where,  based on  available  evidence,  the
likelihood of realization can be established.  The Company  incurred  cumulative
operating losses through 1991 for financial statement and tax reporting purposes
and has adjusted its valuation  allowance  account to recognize a portion of the
net  deferred  tax asset for future  periods  (see Note 7). Tax credits  will be
utilized to reduce current and future income tax expense and payments.

Accounting for Stock-Based Compensation

The Company accounts for stock-based  compensation  under Accounting  Principles
Board  Opinion  ("APB")  No.  25. The  Company  has  disclosed  in a note to the
financial  statements  pro forma net income and  earnings  per share,  as if the
Company had applied the fair value method for stock  options and similar  equity
instruments (see Note 11).

Reclassifications

Amounts  in the  1996 and  1995  consolidated  financial  statements  have  been
reclassified to conform to the 1997 presentation. These reclassifications had no
effect on previously reported consolidated net income.

NOTE 2.  ACQUISITIONS

On March 20, 1996, the Company completed the acquisition of Aurora Systems, Inc.
("Aurora") and Key Voice Technologies,  Inc. ("KVT"),  two companies involved in
Computer-Telephony  Integration  ("CTI")  applications which became wholly-owned
subsidiaries of the Company.  Aurora,  based in Acton,  Massachusetts,  provided
off-the-shelf  CTI  products.  KVT,  based  in  Sarasota,   Florida,   develops,
assembles,  markets, and sells voice processing systems and related products for
business applications.

The  consideration  paid for the  acquisition of Aurora was  approximately  $2.8
million,  of which $1.9 million was paid in cash and approximately  $0.9 million
was paid by  issuance  of 147,791  shares of the  Company's  Common  Stock.  The
consideration  paid  for the  acquisition  of KVT  totaled  approximately  $19.0
million,  of which $8.5  million was paid in cash,  $7.0 million was paid by the
Company's  issuance of a promissory note ("Promissory  Note"),  and $1.5 million
was paid by the  issuance  of  243,097  shares of the  Company's  Common  Stock.
Depending on KVT's performance during the three years following the acquisition,
the Company may be obligated to pay an  additional  $2.0 million  which,  at the
Company's option, may be paid in cash or by the issuance of up to 216,086 shares
of the Company's  Common Stock.  At the beginning of the second quarter of 1997,
72,029  shares of common stock were issued to the original  principal  owners of
KVT. These shares were issued  because KVT met its sales target for 1996.  Based
on KVT's  performance  for 1997, the original owners are eligible for additional
shares of common stock of 72,029  shares or cash at the end of the first quarter
of 1998.

In accordance with the purchase method of accounting,  the purchase price of the
two companies has been allocated to the underlying  assets and liabilities based
on their respective fair values at the date of the  acquisitions.  Any excess of
purchase  price over the value of the net assets is allocated  to goodwill.  The
purchase price,  including  acquisition  costs, for both companies  exceeded net
assets acquired by approximately  $19.3 million.  Such excess is being amortized
on a straight-line  basis over one to eight years.  The cost associated with the
contingent  shares,  based  on  their  respective  fair  values  at the  time of
issuance, will be added to goodwill and amortized over the remaining life of the
original  goodwill.  Such  allocations  have  been  based  on  asset  valuations
performed by outside consultants.

To complete the acquisitions of Aurora and KVT, the Company obtained  additional
funds  from its credit  facility.  The  Company  and Fleet  Capital  Corporation
("Fleet")  amended the Loan Agreement to permit the Company to borrow additional
funds and modify  some of its terms and  covenants.  The  amendment  to the Loan
Agreement  provided  an  increased  borrowing  capacity of $13.5  million  under
acquisition  and  equipment  loans,  and a  revolving  credit  facility of $12.5
million (see Note 6).

As of December  31, 1997,  Aurora sold all of its rights,  title and interest in
the Fastcall product,  Aurora's primary asset, to Spanlink Communications,  Inc.
Aurora may  receive,  over a five year  period,  royalties  totaling  up to $1.1
million with a minimum guarantee of $0.6 million at the end of that period.


NOTE 3.  INVENTORIES

Inventory consists of the following:
-----------------------------------------------------------------------------
December 31,
In thousands                                         1997               1996
-----------------------------------------------------------------------------

   Finished goods                                   $6,336             $6,529
   Work-in-process                                   4,101              3,681
   Materials and supplies                            8,050              9,376
                                                     -----              -----
       Total                                       $18,487            $19,586
                                                   =======            =======
-----------------------------------------------------------------------------

NOTE 4.  PROPERTY

Property consists of the following:
----------------------------------------------------------------------------
December 31,
In thousands                                         1997              1996
----------------------------------------------------------------------------
   Land                                               $656              $556
   Buildings and improvements                       14,104            13,555
   Machinery and equipment                          30,423            28,759
   Less accumulated depreciation                   (28,849)          (27,553)
                                                   -------           -------
       Property - Net                              $16,334           $15,317
                                                   =======           =======
----------------------------------------------------------------------------

Depreciation  expense charged to operations for the years 1997,  1996, and 1995,
was $2,751,000, $2,598,000, and $2,422,000, respectively.



<PAGE>


NOTE 5.  LEASE OBLIGATIONS

The Company and its  subsidiaries  have  various  capital  and  operating  lease
obligations.  Future  minimum  lease  commitments  for  capitalized  leases  and
aggregate minimum rental  commitments under operating lease agreements that have
initial non-cancelable lease terms in excess of one year are as follows:

-------------------------------------------------------------------------------
Year Ending December 31,                                        Operating
In thousands                                                      Leases
-------------------------------------------------------------------------------
   1998                                                             $2,018
   1999                                                              1,752
   2000                                                              1,449
   2001                                                                151
   2002                                                                 25
                                                                     -----
   Total minimum lease commitments                                  $5,395
                                                                    ======
-------------------------------------------------------------------------------

The remaining  lease  commitments  for capital leases is $77,000 with $64,000 of
that to be paid off in 1998.
Assets recorded under capital leases  (included in property in the  accompanying
Consolidated Balance Sheets) are as follows:
-------------------------------------------------------------------------------
December 31,
In thousands                                          1997             1996
-------------------------------------------------------------------------------
    Machinery and equipment                           $218               $823
       Less accumulated depreciation                  (115)              (431)
                                                      ----               ----
    Property - Net                                    $103               $392
                                                      ====               ====
-------------------------------------------------------------------------------

During  1997,  1996,  and 1995,  the  Company  entered  into new  capital  lease
obligations  which  amounted  to  approximately  $18,000,  $67,000,  and $9,000,
respectively.

Operating  leases and  rentals  are for office  space,  and  factory  and office
equipment.  Total rent expense for operating leases, including rentals which are
cancelable on short-term  notice,  for the years ended December 31, 1997,  1996,
and 1995, were $1,929,000, $1,721,000, and $1,262,000, respectively.

NOTE 6.  DEBT

Long-term debt consists of the following:
-------------------------------------------------------------------------------
December 31,
In thousands                                            1997             1996
-------------------------------------------------------------------------------
  Notes payable to Fleet
       Acquisition note (1)                            $5,543            $7,249
       Equipment note I (2)                               139               463
       Equipment note II (3)                            1,647                 -
       Revolving credit (4)                                 -             1,749
  Promissory note (5)                                   5,600             7,000
  Other (6)                                               617               311
  Capitalized leases (7)                                   77               284
                                                       ------           -------
       Total debt                                      13,623            17,056
          Less current maturities on debt               3,701             5,343
                                                       ------           -------
  Total long-term debt                                 $9,922           $11,713
                                                       ======           =======
-------------------------------------------------------------------------------

The  Company  and  Fleet  entered  into a loan  and  security  agreement  ("Loan
Agreement")  in 1994  pursuant to which Fleet  provided  the Company with a $6.0
million  term loan  represented  by a note ("Term Note I"),  and a $9.0  million
revolving  credit loan facility  ("Revolver") in an aggregate amount up to $14.0
million.  On April 29, 1994, the Company and Fleet amended the Loan Agreement to
permit the Company to borrow an additional  $1.3 million  represented by another
note ("Term  Note II") to finance  the  purchase  of  additional  surface  mount
technology equipment.

On March 13, 1996,  the Company and Fleet amended the Loan  Agreement to provide
the Company with a $10.0 million  acquisition loan  ("Acquisition  Loan"),  $3.5
million  equipment loan ("Equipment  Loan"),  and $12.5 million revolving credit
loan facility  ("Amended  Revolver").  The remaining  balances of $2,909,666 and
$706,000 on Term Notes I and II were paid by advances from the Amended  Revolver
and Equipment Loan, respectively.

(1) On March 20, 1996, the Company  borrowed $8.5 million under the  Acquisition
Loan which was used to acquire Aurora and KVT. The  Acquisition  Loan is payable
in equal monthly  principal  installments  of $142,142,  with the balance due on
February 1, 2001.

(2) The Equipment Loan I is payable in equal monthly  principal  installments of
$27,000, with the balance due on June 1, 1998.

(3) On February 5, 1997, the Company  borrowed an additional  $1.9 million under
the  Equipment  Loan  ("Equipment  Loan II") which was used to purchase  surface
mount  technology  ("SMT")  equipment to further  expand the  Company's SMT line
capacity.  Equipment Loan II is payable in equal monthly principal  installments
of $31,667, with the balance due on February 1, 2001.

(4)  Availability  under the Amended Revolver of up to $12.5 million is based on
eligible accounts receivable and inventory, less funds already borrowed. On June
28,  1996,   the  Company  and  Fleet  amended  the  Loan  Agreement  to  adjust
availability  under the Amended Revolver by establishing a special  availability
reserve of $4.0 million and modified certain covenants.

The Acquisition Loan,  Equipment Loan, and Amended Revolver carry interest rates
at either Fleet's prime rate or the London  Interbank  Offered Rate ("LIBOR") at
the Company's  option.  The interest rates can be adjusted annually based on the
Company's  debt to earnings  ratio which will vary the rates from minus 0.50% to
plus 0.50% under or above  Fleet's prime rate and from plus 1.50% to 2.50% above
LIBOR.  As of December 31, 1997,  Fleet's prime  interest rate was 8.50% and the
LIBOR rate was 5.97% with  approximately  96% of the loans based on LIBOR. As of
December 31, 1997, the Company's borrowing rate for loans based on the prime and
LIBOR  rates was 9.00% and 8.47%,  respectively.  For  December  31,  1996,  the
Company's borrowing rate for loans based on the prime and LIBOR rates were 8.25%
and 7.66%, respectively, with approximately 79% of the loans based on LIBOR.

(5) The Promissory Note, which was part of the purchase price of KVT, carries an
interest rate equal to the prime rate with annual  payments of $1.4 million plus
accumulated  interest  payments  with the balance due on March 20,  2001.  As of
December 31, 1997 and 1996, the Company's borrowing rate based on the prime rate
was 8.50% and 8.25%, respectively.

(6)  Other  debt  consists  of a  mortgage  acquired  in  conjunction  with  the
acquisition of KVT and another  mortgage entered into by KVT in order to acquire
an  adjacent  building  for future  expansion.  The  mortgages  require  monthly
payments  of $2,817 and $2,869,  including  interest at fixed rates of 8.75% and
9.125%, respectively.  The final payments are due on August 1, 2005 and June 27,
2007, respectively.

(7) Capital leases are with various financing  entities and are payable based on
the terms of each individual lease (see Note 5).

Scheduled  maturities  of current  and  long-term  debt for the Fleet  Notes (as
defined in the Loan  Agreement),  the Promissory Note, and other debt (excluding
the Amended Revolver and leasing agreements) are as follows:
--------------------------------------------------------------------------------
                                                                      Principal
In thousands                        Fiscal Years                    Installments
--------------------------------------------------------------------------------
    Notes payable                       1998                           $3,638
                                        1999                            3,501
                                        2000                            3,502
                                        2001                            2,351
                                        2002                               19
                                        Beyond 2002                       535
--------------------------------------------------------------------------------

Debt Covenants

The  Company's  indebtedness  to Fleet  is  secured  by  liens on the  Company's
accounts  receivable,  inventories,  intangibles,  land, and all other property.
Among other restrictions,  the amended Loan Agreement contains certain financial
covenants  that require  specified  levels of  consolidated  tangible net worth,
profitability, and other certain financial ratios.

On June 28,  1996,  the Company and Fleet  amended the Loan  Agreement to adjust
availability  under the Amended Revolver by establishing a special  availability
reserve of $4.0 million and also modified certain covenants.

On  September  27,  1996,  the Company and Fleet  amended the Loan  Agreement to
modify  certain  covenants.  The amended Loan  Agreement  also contains  certain
limits on additional borrowings.

On March 27, 1997,  the Company and Fleet  amended the Loan  Agreement to modify
certain  financial  covenants.  As of  December  31,  1997,  the  Company was in
compliance with the terms of the Loan Agreement.

NOTE 7.  INCOME TAXES

The  components of the income tax expense for the years ended December 31 are as
follows:
-------------------------------------------------------------------------
                                            Liability Method
In thousands                          1997           1996          1995
-------------------------------------------------------------------------

    Current -       Federal            $200           $59          $142
                    State               168           159            27
    Deferred -      Federal            (214)         (714)       (4,374)
                    State                (5)          (22)         (129)
                                       ----         -----       -------
       Total provision/(benefit)       $149         ($518)      ($4,334)
                                       ====         =====       =======
-------------------------------------------------------------------------

The income tax provision  reconciled to the tax computed at statutory  rates for
the years ended December 31 is summarized as follows:


<PAGE>


------------------------------------------------------------------------------
In thousands                                         1997      1996       1995
------------------------------------------------------------------------------
    Federal tax at statutory rate
     (35% in 1997, 1996, and 1995)                 $2,054      $452     $1,937
    State income taxes (net of federal tax
      benefit)                                        109       103         18
    Nondeductible charges                             544       329         46
    Alternative minimum tax                           200        77        139
    Utilization of operating loss carryover        (2,539)     (743)    (1,971)
   Adjustment of valuation allowance                 (219)     (736)    (4,503)
                                                    -----      ----     ------
       Income tax provision/(benefit)                $149     ($518)   ($4,334)
                                                     ====     =====    =======
------------------------------------------------------------------------------

Net deferred tax assets of $5,459,000 and $5,239,000 have been recognized in the
accompanying  Consolidated  Balance  Sheets  at  December  31,  1997  and  1996,
respectively. The components of the net deferred tax assets are as follows:

--------------------------------------------------------------------------------
In thousands                                           1997              1996 
--------------------------------------------------------------------------------
    Total deferred tax assets                        $25,201           $27,709
    Total valuation allowance                        (17,037)          (20,240)
                                                      -------          -------
     Total deferred tax assets - net                   8,164             7,469
    Total deferred tax liabilities                    (2,705)           (2,230)
                                                       ------           ------
     Total                                            $5,459            $5,239
                                                      ======            ======
--------------------------------------------------------------------------------

The valuation allowance decreased  $3,203,000 during the year ended December 31,
1997. The decrease was primarily  related to (1) the re-evaluation of the future
utilization of net operating losses ("NOLs") of $219,000, and (2) the net change
in temporary differences of deferred tax assets,  deferred tax liabilities,  and
operating loss carryforwards of $2,984,000. The Company periodically reviews the
requirements for a valuation  allowance and makes  adjustments to such allowance
when  changes in  circumstances  result in changes in judgment  about the future
realization of deferred tax assets.  Based on a continual  re-evaluation  of the
realization of the deferred tax assets, the valuation  allowance was reduced and
a tax benefit of $219,000 was  recognized  in the quarter  ended March 30, 1997.
Management believes, although realization is not assured, that it is more likely
than not that the  Company  will  realize  this tax  benefit.  The amount of the
deferred tax asset considered realizable,  however, could be reduced in the near
term if estimates of future taxable income during the  carryforward  periods are
reduced.

The  Company  has net  operating  loss and credit  carryovers  of  approximately
$55,971,000 and $2,856,000, respectively, which, if not utilized, will expire as
follows:
------------------------------------------------------------------------------
In thousands                                     Net Operating
  Expiration Dates                                   Losses        Tax Credits
------------------------------------------------------------------------------
          1998                                      $     -           $1,846
          1999                                       11,405              504
          2000                                       27,762               66
          2001                                        5,260                -
          2002                                        6,486                -
            After 2002                                5,058              440
                                                     ------            -----
            Total                                   $55,971           $2,856
                                                    =======           ======
------------------------------------------------------------------------------


<PAGE>


Based on the  Company's  interpretation  of Section 382 of the Internal  Revenue
Code, the determination of the valuation allowance was calculated assuming a 50%
ownership  change,  which could limit the  utilization  of the tax net operating
loss and tax credit  carryforwards in future periods starting at the time of the
change.  An  ownership  change  could  occur if changes in the  Company's  stock
ownership  exceeds 50% of the value of the  Company's  stock during a three year
look back period.

The components of the net deferred tax assets (liabilities) at December 31, 1997
and 1996 are as follows:
--------------------------------------------------------------------------------
Deferred Assets/(Liabilities)
In thousands                                         1997                1996
--------------------------------------------------------------------------------
    Net loss carryforwards                          $19,030             $22,095
    Tax credit carryforwards                          2,856               3,075
    Inventory write downs and capitalization          1,268               1,068
    Pension                                             227                 265
    Postretirement                                      239                 304
    Compensation and benefits                           318                 196
    Capitalized software development costs              246                 266
    Contingencies                                        29                  37
    Other deferred tax assets                            64                  46
    Fixed asset depreciation                         (2,607)             (2,230)
    Goodwill amortization                               826                 358
    Income reported in different periods for
      financial reporting and tax purposes               -                    -
    Other deferred tax liabilities                       -                    -
                                                     ------              ------
      Net deferred tax asset                         22,496              25,480
    Less:  Valuation allowance                      (17,037)            (20,241)
                                                     ------             -------
      Total                                          $5,459              $5,239
                                                     ======              ======
--------------------------------------------------------------------------------

NOTE 8.  PENSION AND SAVINGS PLANS

The Company  currently  has one pension plan which  provides  benefits  based on
years of service and an employee's  compensation  during the employment  period.
The calculation of pension benefits prior to 1993 was based on provisions of two
previous  pension plans.  One plan provided  pension  benefits based on years of
service and an employee's  compensation  during the employment period. The other
plan provided  benefits  based on years of service only.  The funding policy for
the plans was to make the minimum  annual  contributions  required by applicable
regulations.  Assets of the plans are  generally  invested in equities and fixed
income instruments.

The  following  table  sets  forth the  funded  status of the plans and  amounts
recognized in the Company's Consolidated Balance Sheets at December 31, 1997 and
1996.


<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
In thousands                                                   1997             1996
----------------------------------------------------------------------------------------
<S> <C>
    Actuarial present value of benefit obligation:
    Accumulated benefit obligation (including vested
      benefits of $15,950 and $12,313, respectively)         ($17,308)        ($13,391)
                                                             ========         ========

    Projected benefit obligation for service to date         ($18,541)        ($14,218)
    Plan assets at fair value                                  19,025           15,679
                                                              -------          -------
    Plan assets more than projected benefit obligation            484            1,461
    Unrecognized net gain from past experience                   (875)          (2,065)
    Unrecognized net gain from prior service cost                (219)            (254)
    Unrecognized net asset at date of implementation of
      SFAS No. 87 amortized over 14 years                         (58)             (86)
                                                               ------           ------
      Accrued liabilities for benefit plans at December 31      ($668)           ($944)
                                                               ======           ======
----------------------------------------------------------------------------------------


Net  periodic  pension cost for 1997,  1996,  and 1995  included  the  following
components:
<CAPTION>
---------------------------------------------------------------------------------------------------------------
In thousands                                                                     1997         1996         1995
---------------------------------------------------------------------------------------------------------------
    Service cost-benefits earned during the period                             $1,227       $1,081         $931
    Interest cost on projected benefit obligation                               1,047          890          751
    Actual (return) or loss on plan assets                                     (2,590)      (2,634)      (2,122)
    Net amortization and deferral of other items                                1,279        1,510        1,199
                                                                                -----        -----        -----
       Net periodic pension cost                                                 $963         $847         $759
                                                                                 ====         ====         ====
---------------------------------------------------------------------------------------------------------------

Assumptions used in accounting for the plans were as follows:
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                                  1997         1996        1995
---------------------------------------------------------------------------------------------------------------
    Discount rate                                                                7.00%        7.50%       7.50%
    Rate of increase in future compensation levels                               4.00%        4.00%       4.00%
    Expected long-term rate of return on assets                                  9.00%        9.00%       9.00%
---------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to providing pension benefits,  the Company  contributes to a 401(k)
plan, based on an employee's contributions.  Participants can contribute from 2%
to 10% of their  salary as defined in the terms of the plan.  The Company  makes
matching  contributions  equal  to 25%  of a  participant's  contributions.  The
Company's  total  expense for the matching  portion to the 401(k) plan for 1997,
1996, and 1995 was $411,000, $341,000, and $278,000, respectively.

NOTE 9.  POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The effect of SFAS No. 106, "Employers'  Accounting for Postretirement  Benefits
Other Than Pensions," on income from continuing  operations for 1997,  1996, and
1995 was an expense of $64,000, $41,000, and $311,000, respectively.

The Company  provides  certain  health care  coverage  (until age 65),  which is
subsidized by the retiree through  insurance  premiums paid to the Company,  and
life insurance  benefits for  substantially  all of its retired  employees.  The
Company's postretirement health care benefits are not currently funded.

The  following  table sets forth the amounts of the  accumulated  postretirement
benefit obligation at January 1, 1997, 1996, and 1995:


<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
In thousands                                                                  1997           1996           1995
----------------------------------------------------------------------------------------------------------------
<S> <C>
    Retirees                                                                  $162           $137           $354
    Actives eligible to retire                                                 480            415            653
    Other active participants ineligible to retire                             198            208            922
                                                                               ---          -----          -----
       Total                                                                  $840           $760         $1,929
                                                                              ====           ====          =====
----------------------------------------------------------------------------------------------------------------

Net  postretirement  benefit  cost for years ended  December 31 consisted of the
following components:
<CAPTION>
----------------------------------------------------------------------------------------------------------------
In thousands                                                             1997            1996             1995
----------------------------------------------------------------------------------------------------------------
    Service cost                                                          $22             $20              $75
    Interest cost                                                          60              55              156
    Actual return on assets                                                 -               -                -
    Amortization of the unrecognized transition
     obligation                                                            91              91               91
    Amortization of gain                                                 (109)           (125)             (11)
    Amortization of prior service cost                                      -               -                -
                                                                            -             ---             ----
        Total                                                             $64             $41             $311
                                                                          ===             ===             ====
----------------------------------------------------------------------------------------------------------------

The following table sets forth funded status of the plans and amounts recognized
in the Company's Consolidated Balance Sheets at December 31, 1997 and 1996.
<CAPTION>
----------------------------------------------------------------------------------------------------------------
In thousands                                                                               1997           1996
----------------------------------------------------------------------------------------------------------------
    Plan assets at fair value                                                               $ -            $ -
    Accumulated postretirement benefit obligation:
       Retirees                                                                            (162)          (137)
       Fully eligible participants                                                         (480)          (415)
       Other active participants                                                           (198)          (208)
    Unrecognized prior service cost                                                           -              -
    Unrecognized net gain                                                                (1,221)        (1,583)
    Unrecognized transition obligation                                                    1,358          1,449
                                                                                          -----          -----
       Accrued liabilities for benefit plans at December 31                               ($703)         ($894)
                                                                                          =====          =====
----------------------------------------------------------------------------------------------------------------
</TABLE>
The  assumed  health  care cost trend  rate used in  measuring  the  accumulated
postretirement  benefit  obligation  as of January 1, 1997 was 9% for 1997,  the
trend rate  decreasing each successive year until it reaches 5.25% in 2004 after
which it remains constant. The discount rate used in determining the accumulated
postretirement  benefit  obligation  cost  was  7.75%.  A  one  percentage-point
increase in the assumed health care cost trend rate for each year would increase
the accumulated  postretirement benefit obligation as of January 1, 1997 and net
postretirement  health care cost by  approximately  $5,000 and service cost plus
interest cost by approximately $9,000. The postretirement  benefit obligation is
not funded and does not  include  any  provisions  for  securities,  settlement,
curtailment, or special termination benefits.


<PAGE>


NOTE 10.  STOCK-BASED COMPENSATION PLANS

As of December  31,  1997,  the Company had two basic  stock-based  compensation
plans. The 1992 Stock Incentive Plan (the "Stock Incentive Plan"),  provides for
stock  options  to  purchase  shares of Common  Stock  which may be  granted  to
officers,  directors,  and certain key  employees  as  additional  compensation.
Pursuant to the terms of the 1992  Non-employee  Directors  Stock Incentive Plan
(the "Directors  Stock Incentive  Plan"),  each  non-employee  director shall be
awarded  3,333  shares of the  Company's  Common  Stock for each fiscal year the
Company  reports  income.  In January 1996, in accordance  with the terms of the
Directors  Stock  Incentive  Plan,  the Board of Directors  adopted a resolution
suspending 833 of the 3,333 shares of the Company's  common stock  automatically
awarded to  non-employee  directors  under  such  circumstances.  In 1997,  each
non-employee  director was awarded 2,500 shares  related to income earned by the
Company  for  fiscal  year  1996.  The  plans  are  composed  of stock  options,
restricted  stock,  nonstatutory  stock,  and  incentive  stock.  The  Company's
incentive plans are administered by the Compensation  Committee of the Company's
Board of Directors.


On April 30, 1996, the Company's  stockholders approved a resolution to increase
the number of shares of Common Stock under the  Company's  1992 Stock  Incentive
Plan from 800,000 to  1,550,000.  As of December 31,  1997,  all options  issued
under the Company's 1982 Stock Incentive Plan have either been exercised or have
expired. The Company has previously accepted notes relating to the non-qualified
stock  options  exercised  by officers  and  employees.  These notes  receivable
relating to stock  purchases  amounted to  $161,000,  $168,000,  and $176,000 at
December 31, 1997,  1996,  and 1995,  respectively,  and have been deducted from
Stockholders' Equity.

Options  granted  for years  1997 and 1996 have a maximum  term of ten years and
vest over a three year period. Options become exercisable in installments of 33%
per year on each of the first through the third anniversaries of the grant date.
All options  granted through the Stock Incentive Plan are granted at an exercise
price equal to the market price of the Company's Common Stock on the grant date.
In December 1997, the Company granted some  nonstatutory  stock options totaling
50,000  shares,  which are outside the 1992 Stock  Incentive  Plan.  These stock
options vest over a five year period and will be registered at a later date. The
Company has charged against income in 1997,  compensation  expense of $4,000 for
these stock options.

The Company applies APB No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plan other than the performance based option that is part of the plan for
its directors.  Common Stock has been issued by the Company to its directors for
years that show positive net income. The compensation cost that has been charged
against income for its director's  performance-based stock was $97,000, $66,000,
and $116,000 for 1997, 1996, and 1995, respectively.


<PAGE>
<TABLE>

Information regarding stock options is summarized below:
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                      1997         (1)             1996          (1)          1995         (1)
----------------------------------------------------------------------------------------------------------------
<S> <C>
Options outstanding,
   January 1;                       659,524       $7.95           449,241       $6.50        363,172      $3.68
    Granted                         298,450        8.25           277,062        9.12        268,073       7.95
    Exercised                       (32,216)       5.43           (52,617)       1.58       (157,044)      2.13
    Terminated                      (66,029)       8.79           (14,162)       8.72        (24,960)      7.00
                                    -------                       -------                    -------
Options outstanding,
   December 31;                     859,729        8.08           659,524        7.95        449,241       6.50
                                    =======                       =======                    =======

Options exercisable,
   December 31;                     342,880        7.46           212,392        6.30        160,403       5.07

Per share ranges of
  options outstanding
  at December 31                        $1.41-$11.75                  $1.41-$11.75              $1.41-$11.75
Dates through which options
    outstanding at December 31,
   were exercisable                     1/98-12/2007                   1/97-5/2006              1/96-10/2005

(1)  Fair value weighted-average exercise price at grant date.
----------------------------------------------------------------------------------------------------------------
The following table summarizes  information concerning currently outstanding and
exercisable options at December 31, 1997:
<CAPTION>
-------------------------------------------------------------------------------------------------
                                    Options Outstanding                               Options Exercisable
                   ----------------------------------------------------       ----------------------------------
Range of                Number     Weighted-Average                              Number
Exercise             Outstanding      Remaining         Weighted-Average        Exercisable     Weighted-Average
Prices               at 12/31/97   Contractual Life     Exercise Price          at 12/31/97     Exercise Price
----------------------------------------------------------------------------------------------------------------
    $1.41 to  3.00      58,906          4.8                  $1.68                58,906              $1.68
     5.73 to  7.77     298,195          8.1                   7.07               138,778               7.36
     8.56 to  9.38     386,001          8.5                   9.04                86,073               9.31
    10.50 to 11.75     116,627          8.0                  10.71                59,123              10.73
                       -------                                                    ------
     1.41 to 11.75     859,729          8.0                   8.08               342,880               7.46
                       =======                                                   =======
----------------------------------------------------------------------------------------------------------------
</TABLE>

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
------------------------------------------------------------------------------
                                       1997           1996           1995
------------------------------------------------------------------------------
  Risk-free interest rate              5.51%          6.18%          6.90%
  Expected life                        3.65           3.82           3.02
  Expected volatility                    73%            90%           101%
  Expected dividends                   none           none           none
------------------------------------------------------------------------------

If compensation cost for the Company's Stock Incentive Plans had been determined
based on the fair value at the grant dates for awards under the plan, consistent
with the method of FASB Statement No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:


<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
In thousands except per share amounts                                       1997           1996            1995
----------------------------------------------------------------------------------------------------------------
<S> <C>
  Net income:                As reported                                   $5,719         $1,809          $9,519
                             Compensation expense                             525            218               -
                                                                           ------         ------          ------
                             Pro forma                                     $5,194         $1,591          $9,519
                                                                           ======         ======          ======

  Basic earnings per share:
                             As reported                                    $0.66          $0.21           $1.27
                             Pro forma                                      $0.60          $0.19           $1.27

  Diluted earnings per share:
                             As reported                                    $0.65          $0.21           $1.20
                             Pro forma                                      $0.59          $0.18           $1.20
----------------------------------------------------------------------------------------------------------------

The Company would not have recognized any compensation  expense for 1995 because
the 1995 options were not vested until 1996.

NOTE 11.  SEGMENT INFORMATION

During 1997,  1996,  and 1995,  substantially  all of the Company's  sales,  net
income, and identifiable net assets were attributable to the  telecommunications
industry.

The  Company  had  sales in excess  of 10% of net  sales to three  customers  as
follows:
<CAPTION>
-------------------------------------------------------------------------------------------------------------
In thousands                                                            1997            1996          1995
-------------------------------------------------------------------------------------------------------------
    Sales:
       ALLTEL Supply, Inc.                                             $21,537         $19,472       $20,575
       Graybar Electric Company, Inc.                                   33,342          31,719        30,857
       Sprint/North Supply , Inc.                                       26,445          22,432        18,357

    Percentage of net sales:
       ALLTEL Supply, Inc.                                                 18%             19%           22%
       Graybar Electric Company, Inc.                                      28%             31%           33%
       Sprint/North Supply , Inc.                                          22%             22%           19%
-------------------------------------------------------------------------------------------------------------
</TABLE>
ALLTEL Supply,  Inc., a subsidiary of ALLTEL  Corporation,  was a shareholder of
the Company until 1996. As of December 31, 1995, ALLTEL had accounts  receivable
with the Company of $1,415,000.

NOTE 12.  COMMITMENTS AND CONTINGENT LIABILITIES

The Company's  facilities are subject to a variety of federal,  state, and local
environmental protection laws and regulations,  including provisions relating to
the discharge of materials  into the  environment.  The cost of compliance  with
such  laws  and  regulations  has not had a  material  adverse  effect  upon the
Company's capital expenditures,  earnings or competitive position, and it is not
anticipated to have a material adverse effect in the future.

In 1988,  the Company  voluntarily  discontinued  use of a concrete  underground
hydraulic oil and chlorinated  solvent  storage tank. In conjunction  therewith,
nearby soil and groundwater  contamination  was noted. As a result,  the Company
developed a plan of remediation  that was approved by the Virginia Water Control
Board in January  1989.  The plan was later amended and approved by the Virginia
Department  of  Environmental  Quality,  after which the Company  commenced  the
remediation efforts required thereunder. In 1993, the Company provided a $45,000
reserve for the estimated cost to implement the remediation plan.

In October 1994, the Company installed all the required  equipment in accordance
with the  remediation  plan and  started the  process of pumping  hydraulic  oil
residue  from  the  underground  water.  The  oil  is  deposited  into  approved
containers and taken to a hazardous waste site in accordance with the corrective
action plan.  As of December 31, 1997,  the Company has incurred  total costs of
approximately  $55,000 and expects the pumping  process to be completed by early
1999.

NOTE 13.  QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                             First         Second       Third        Fourth
In thousands except per share amounts                         Quarter      Quarter      Quarter      Quarter
------------------------------------------------------------------------------------------------------------
<S> <C>
1997
    Sales                                                     $26,855      $29,379      $31,091      $31,236
    Gross profit                                               11,059       11,751       12,522       12,011
    Interest expense                                              427          449          436          386
    Goodwill amortization                                       1,037          859          855          816
    Net income                                                    671        1,142        2,002        1,904
    Net earnings per common share: Basic                         0.08         0.13         0.23         0.22
------------------------------------------------------------------------------------------------------------
1996
    Sales                                                     $22,027      $23,542      $28,849      $27,764
    Gross profit                                                7,464        8,159       10,873       11,385
    Interest expense                                              227          499          483          417
    Goodwill amortization                                          91          868          855          860
    Net income                                                  1,185       (1,628)         908        1,344
    Net earnings per common share: Basic                         0.14        (0.19)        0.11         0.16
------------------------------------------------------------------------------------------------------------
</TABLE>
Previously  reported  quarterly  information has been revised to reflect certain
reclassifications.  These reclassifications had no effect on previously reported
consolidated net income. Earnings per common share have been restated to conform
to FAS No. 128, "Earnings Per Share."

In the first quarter of 1997, the Company  reevaluated the future utilization of
its deferred tax assets for future  periods.  Based on the  reevaluation  of the
realizability  of the deferred tax assets,  the valuation  allowance was reduced
and a tax benefit of $219,000 was recognized (see Note 7).

In the fourth quarter of 1997, the Company  revalued  certain slow moving analog
inventory that resulted in an additional cost of $634,000.  This additional cost
dropped the gross margin from previous quarters of 40% to 38%.

In  the  first  quarter  of  1996,  the  Company  acquired  Aurora  and  KVT  by
restructuring its indebtedness to Fleet and borrowing additional funds (see Note
2 and Note 6).  The major  impact on  operations  was an  increase  of  interest
expense  for the last three  quarters  of 1996 of $949,000  and  recognition  of
goodwill amortization of $2,651,000.  All costs associated with the acquisitions
were offset by the increase in revenues and income  (excluding  acquisition  and
corporate  allocation  costs) produced by the new subsidiaries of $9,671,000 and
$4,342,000,  respectively.  Also in the  first  quarter  of  1996,  the  Company
reevaluated  the  future  utilization  of its  deferred  tax  assets  for future
periods.  Based on the  reevaluation  of the  realizability  of the deferred tax
assets,  the  valuation  allowance was reduced and a tax benefit of $736,000 was
recognized (see Note 7).

The Company  recognizes  costs  based on  estimates  throughout  the fiscal year
relating to  inventory.  The results of the  physical  inventory  and the fiscal
year-end close reflected a favorable  adjustment with respect to such estimates,
resulting in approximately  $289,000 of additional income, which is reflected in
the fourth quarter of 1996.



<PAGE>
<TABLE>

-----------------------------------------------------------------------------------------------------------------
FIVE YEAR FINANCIAL DATA
<CAPTION>
Selected Consolidated Statements of Operations Data
In thousands except
     per share amounts                                1997         1996         1995         1994         1993
-----------------------------------------------------------------------------------------------------------------
<S> <C>
Net sales:
    As reported (1)                                 $118,561     $102,182      $94,729      $77,077      $68,996
    Income before income taxes
      and extraordinary item                           5,868        1,291        5,535        3,730        2,545
Net income                                             5,719        1,809        9,869        3,225        2,416
Earnings per common share
    and common equivalent share:
      Basic (2)                                         0.66         0.21         1.27         0.38         0.40
-----------------------------------------------------------------------------------------------------------------
(1) Prior  years have been  reclassified  to conform to 1997  presentation.  

(2) Earnings  per share  prior to 1995 have been  restated  to reflect the one-
    for-three reverse stock split.

<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Selected Consolidated Balance Sheet Data
In thousands                                          1997         1996         1995         1994         1993
-----------------------------------------------------------------------------------------------------------------

Current assets                                       $37,107      $30,767      $33,740      $26,199      $28,301
Total assets                                          79,264       74,352       56,692       42,260       44,803
Current liabilities                                   20,431       20,159       15,469       14,568       13,358
Long-term debt and other
    long-term liabilities                             13,998       15,629        6,929        6,649       20,695
Stockholders' equity                                  44,835       38,564       34,294       21,043       10,750
-----------------------------------------------------------------------------------------------------------------

RELATED STOCKHOLDERS MATTERS

Quarterly Common Stock Information

The  following  table  sets  forth,  for the  periods  shown,  the  high and low
quarterly closing sales prices in the over-the-counter  market for the Company's
Common  Stock,  as  reported by the  National  Association  of Security  Dealers
Automated  Quotation System ("Nasdaq").  The Company's Common Stock is traded in
the  National  Market  System of the Nasdaq  Stock  Market  under the  Company's
symbol, CMDL.
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                        1997                                       1996
Fiscal Quarters                                High             Low                        High           Low
-----------------------------------------------------------------------------------------------------------------
    First Quarter                              8  7/8           5   5/8                  11   3/8         8  3/8
    Second Quarter                             8  7/8           5   7/8                  12   1/2         9  1/4
    Third Quarter                             10 1/16           7   3/8                   9     -         6    -
    Fourth Quarter                            13  5/8           9   1/4                   7   7/8         5  7/8
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The  Company  has never  paid a dividend  on its  Common  Stock and its Board of
Directors currently intends to continue for the foreseeable future the policy of
not paying cash dividends on Common Stock. The Company is prohibited from paying
dividends  due to the Loan  Agreement  with Fleet  except on Series A  Preferred
Stock (see Note 6 to Consolidated Financial Statements).

The  Company's  Common Stock trades on The Nasdaq Stock Market under the symbol:
CMDL.



<PAGE>


OFFICERS

William G. Mustain
Chairman, President and Chief Executive Officer
-----------------------------------------------
Mr. Mustain is Chairman,  President and Chief Executive  Officer of the Company.
He joined the  Company as Vice  President  in June 1987 and  assumed his current
position in May 1989.  He has served as a director of the Company since 1989 and
is a member of the Nominating Committee of the Board of Directors.

William E. Porter
Executive Vice President
------------------------
Mr. Porter was elected  Executive  Vice President in May 1997 and is responsible
for business development and strategic planning. Mr. Porter served as a Director
of the Company from July 1994 to May 1997.

Christian L. Becken
Senior Vice President and Chief Financial Officer
-------------------------------------------------
Mr.  Becken was elected  Senior Vice  President and Chief  Financial  officer in
December 1997 and is  responsible  for finance.  Prior to his  appointment,  Mr.
Becken, was a Vice President and Treasurer of Turner Broadcasting  System, Inc.,
a diversified media and entertainment company, for 10 years.

William C. Grover
Senior Vice President, Sales and Marketing
------------------------------------------
Mr.  Grover  was  elected  Senior  Vice  President  in  September  1995  and  is
responsible for Sales and Marketing.  He joined the Company in 1993 as President
of Comdial Enterprise Systems, Inc., a subsidiary of the Company.


Wayne R. Wilver
Senior Vice President, Treasurer, and Secretary
-----------------------------------------------
Mr.  Wilver was  elected  Senior  Vice  President  in May 1989 and was the Chief
Financial  Officer until December 1997. He joined the Company as Vice President,
Chief Financial Officer, Treasurer, and Secretary in July 1986.

Ove Villadsen
Senior Vice President, Engineering
----------------------------------
Mr.  Villadsen was elected Senior Vice President in 1997. He is responsible  for
the Company's  product  design and  engineering  activities.  He joined  Comdial
Business  Communications  Corporation  (CBCC),  a subsidiary of the Company,  in
November 1982, and between 1982 and 1989 served as Vice President of CBCC.

Joe D. Ford
Vice President, Human Resources
-------------------------------
Mr. Ford was elected  Vice  President in May 1995 and is  responsible  for Human
Resources.  Between 1982 and May 1995,  he served as the  Company's  Director of
Human Resources.

Keith J. Johnstone
Vice President, Manufacturing
-----------------------------
Mr.  Johnstone  was elected Vice  President in May 1990 and is  responsible  for
Manufacturing  Operations.  Between 1980, when he joined the Company,  and 1990,
Mr.  Johnstone  held a number of  management  positions,  including  Director of
Materials and Director of Customer Service.

Lawrence K. Tate
Vice President, Quality
-----------------------
Mr. Tate was elected Vice  President  in November  1982 and is  responsible  for
Quality. Between 1969 and 1982, he held various management positions,  including
Vice President-Manufacturing Operations.


<PAGE>


BOARD MEMBERS

William G. Mustain
Chairman
--------
See previous page.

A.M. Gleason
Vice Chairman, President of the Port of Portland
------------------------------------------------
Mr. Gleason retired in May 1995 as Vice Chairman and a director of PacifiCorp, a
diversified  public  utility.  He  currently  serves as President of the Port of
Portland.  He is also a director of  Tektronix,  Inc.  and Fred Meyer,  Inc. Mr.
Gleason has served as a director of the Company  since 1981 and as Vice Chairman
of the Board of Directors  since April 1995 and is a member of the  Compensation
and Nominating Committees of the Board of Directors.

Michael C. Henderson
Chairman of the Board of Albina Community Bancorp.
--------------------------------------------------
Mr. Henderson is Chairman of the Board of Albina Community  Bancorp.  He retired
in  February,  1998 as  President  and Chief  Executive  Officer  of  PacifiCorp
Holdings,    Inc.,   a   PacifiCorp   subsidiary   which   held   interests   in
telecommunications, energy and financial services. Mr. Henderson has served as a
director  of  the  Company  since  1995  and  is a  member  of  the  Audit,  and
Compensation Committees of the Board of Directors.

John W. Rosenblum
Dean of the Jepson School of Leadership Studies at the University of Richmond
-----------------------------------------------------------------------------
Mr.  Rosenblum  is  Dean of the  Jepson  School  of  Leadership  Studies  at the
University  of Richmond.  Prior to serving at the  University  of Richmond,  Mr.
Rosenblum was a Tayloe Murphy Professor of Business Administration at the Darden
Graduate School of Business  Administration at the University of Virginia. He is
also a director of Chesapeake Corporation,  Cadmus Communications Corp., T. Rowe
Price  Associates,  and Cone Mills  Corporation.  Mr.  Rosenblum has served as a
director of the Company  since 1992 and is a member of the Audit,  Compensation,
and Pension Committees of the Board of Directors.

Dianne C. Walker
Independent Consultant
----------------------
Ms.  Walker is an  independent  consultant.  Prior to  January  1995,  she was a
consultant to Bear Stearns & Co. Inc., an investment banking firm. She is also a
director of Satelite Technology Management, Inc. Arizona Public Service Company,
and  Microtest,  Inc. Ms.  Walker has served as a director of the Company  since
1986 and is a member of the Audit,  Nominating,  and Pension  Committees  of the
Board of Directors.



<PAGE>



Transfer Agent and Registrar
----------------------------
 ChaseMellon Shareholder Services
 New York, New York

Independent Auditors
--------------------
 Deloitte & Touche LLP
 Richmond, Virginia

Investor Relations
------------------
Dick Bucci - Director, Investor Relations
Phone:  (804) 978-2525
Fax:    (804) 978-2438
E-Mail:  dbucci@comdial.com

World Wide Web
--------------
http://www.comdial.com

Form 10-K
---------
On written request, Comdial Corporation
will furnish to stockholders a copy of
its Form 10-K for the most recent year.
Address your request to Linda Falconer,
Comdial Corporation, P.O. Box 7266,
Charlottesville, Virginia  22906-7266