<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

 [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

    [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

          FOR THE TRANSITION PERIOD FROM_____________ TO_____________

                         COMMISSION FILE NUMBER: 0-9023

   COMDIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


              DELAWARE                                       94-2443673
     (STATE OR OTHER JURISDICTION OF                      (I.R.S. EMPLOYER
     (INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NUMBER)

   106 CATTLEMEN ROAD SARASOTA, FLORIDA                        34232
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                    (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (941)922-3800

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

               TITLE OF CLASS COMMON STOCK (PAR VALUE $0.01 EACH)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 18, 2002, was approximately $5,706,991 (See Item 5).  The
number of shares of Common Stock outstanding as of March 18,2002, was
9,204,824.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of Comdial's  Definitive  Proxy
Statement for its 2001 Annual  Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 2001,
is incorporated by reference under Part III of this Form 10K.
<PAGE>

<TABLE>
<CAPTION>

                               TABLE OF CONTENTS

Part I
<S>                   <C>                                                     <C>
Item 1.                Business                                                3
                         (a) General Development of Business                   3
                         (b) Financial Information About Industry Segment     11
                         (c) Narrative Description of Business                12

Item 2.                Properties                                             17

Item 3.                Legal Proceedings                                      18

Item 4.                Submission of Matters to a Vote of Security Holders    19


Part II

Item 5.                Market for Registrant's Common Equity and Related
                       Stockholder Matters                                    20

Item 6.                Selected Financial Data                                20

Item 7.                Management's Discussion and Analysis of Financial
                       Condition and Results of Operations                    21

Item 7A.               Quantitative and Qualitative Disclosures About
                       Market Risk                                            33

Item 8.                Financial Statements and Supplementary Data            33

Item 9.                Changes in Accountants                                 60

Part III

Item 10.               Directors and Executive Officers of the Registrant     62

Item 11.               Executive Compensation                                 62

Item 12.               Security Ownership of Certain Beneficial Owners
                       and Management                                         62

Item 13.               Certain Relationships and Related Transactions         62

Part IV

Item 14.               Exhibits, Financial Statement Schedules, and
                       Reports on Form 8-K                                    63

</TABLE>

                                       2
<PAGE>

PART I

ITEM 1. BUSINESS

(A) GENERAL DEVELOPMENT OF BUSINESS

Comdial Corporation (together with its subsidiaries, "Comdial" or "the
Company"), is a Delaware corporation formerly based in Charlottesville,
Virginia. During the first quarter 2001, Comdial moved its corporate
headquarters to Sarasota, Florida. Comdial was originally incorporated in Oregon
in 1977 and was reincorporated in Delaware in 1982 when it acquired General
Dynamics Telephone Systems Center, Inc. (formerly known as Stromberg-Carlson
Telephone Systems, Inc.), a wholly owned subsidiary of General Dynamics
Corporation. Comdial's common stock is traded in the Nasdaq SmallCap Market(R)
of the National Association of Security Dealers Automated Quotation System
("Nasdaq(R)") under the symbol, "CMDL".

Comdial(R) designs and markets sophisticated voice communications solutions for
small to mid-sized offices. Comdial products consist of business telephone
systems, unified and voice messaging, call processing, and computer telephony
integration solutions. Comdial currently has an installed base of approximately
375,000 telephone systems, 4 million telephones and 80,000 messaging systems.

During 2001, Comdial was comprised of three major business segments:(1) voice
switching, (2) messaging, and (3) computer telephony integration ("CTI")
applications and other.

RECENT DEVELOPMENTS

On March 6, 2002,  Comdial and Bank of America entered into the First Amendment
to the Amended and Restated Credit Agreement (the "First Amendment") which
reduced the Revolver commitment to $8 million, reduced the Term Loan to
approximately $4.9 million and agreed to extend the $1.5 million in letters of
credit until March 31, 2003. Both the Revolver and the Term Loan mature March
31, 2003.

The First Amendment changed the schedule of principal payments on the Term Loan
balance.  The term note will start amortizing in September 2002 using a 36-month
amortization schedule.  The First Amendment also changed the applicable interest
rate to an interest rate based on the Prime Rate plus a specified margin.
Effective as of March 6, 2002, the interest rate is equal to the Prime Rate plus
four percent.  As of March 6, 2002, Comdial had no additional availability under
the Revolver or the Term Loan.

Comdial's indebtedness to Bank of America under the Credit Agreement, as amended
by the First Amendment is secured by liens on all of Comdial's properties and
assets.  The First Amendment modified the financial covenants relating to
consolidated net income and contained other covenants related to consolidated
net worth and cross default provisions.  The First Amendment also provided for
the waiver of all 2001 violations and defaults.

In addition to the terms discussed above, in connection with the First
Amendment, $10 million of outstanding debt of Comdial to Bank of America was
converted into Series B Alternate Rate Cumulative Convertible Redeemable
Preferred Stock, par value $10 per share (the "Preferred Stock").  Comdial
issued 1,000,000 shares of the Preferred Stock to Bank of America.  The
Preferred Stock can be converted at any time into a maximum of 1.5 million
shares of Comdial common stock. This conversion ratio will be reduced to as low
as 500,000 shares of common stock in the event Comdial elects to pay down the
Term Loan by up to $3 million in connection with new investment into the Company
by an outside investor. Comdial has a call option allowing it to buy out Bank of
America's Preferred Stock at par value, but Bank of America has no mandatory
redemption. The Preferred Stock has a 5 percent cumulative annual dividend if
paid with cash or 10 percent if paid in common stock, at the election of
Comdial. The shares of common stock issuable to Bank of America upon conversion
of the Preferred Stock and as payment of dividends are subject to certain demand
and piggyback registration rights pursuant to a registration rights agreement
which will require the Company to register such shares of common stock for
resale in the public market upon request.

In the first quarter of 2002, the Company reached agreements with certain
vendors and other creditors to forgive $7.1 million in current non-bank
obligations, net of fees payable to the debt management firm that the Company
hired to assist with these efforts. These liabilities included amounts owed to a
former distributor of the Company's products, several component parts suppliers
and a seller of industrial equipment. The gains on forgiveness of $4.6 million
will be recognized in 2002.

Included in the non-bank obligations reduction is $2.1 million related to a
promissory note that was canceled by a supplier upon Comdial returning the
original inventory purchased from the supplier. Upon return of the inventory,
Comdial entered into a purchase commitment with the supplier to repurchase the
inventory by January 2007, with a minimum monthly purchase amount of $25,000.
Also included in the non-bank obligations reduction is $0.5 million related to a
supplier canceling the amount owed by Comdial in exchange for a purchase
commitment of $0.8 million for product that Comdial must purchase by December
2002.

On March 21, 2002, the Company and Relational Funding Corporation and its
assignees (collectively "RFC") reached agreement to reduce the total payments
due under the operating and capital leases from a combined balance of
approximately $5.5 million to a payout schedule over 72 months totaling
approximately $2.3 million. For the first 30 months, the monthly payment is
$39,621, which then reduces to $25,282. In addition, Comdial agreed to provide
RFC warrants to purchase 175,000 shares of the common stock of the Company for
$0.61 per share, which have an estimated fair market value of approximately $0.1
million.

                                       3

<PAGE>

RESTRUCTURING

In 2000, due to declining market conditions, unfavorable economic factors,
uncompetitive product costs, and excess inventory levels, the Board of Directors
and management deemed it necessary to develop a plan to restructure the Company.
This plan was approved by the Board of Directors, and implementation commenced
during the fourth quarter of 2000.   Significant terms of the restructuring plan
("the Plan") included outsourcing the manufacturing operations, reducing the
Company's workforce and selling the headquarters and manufacturing facility in
Virginia. The primary objectives of the Plan were:

1. Consolidation of business units
2. Reorganization of the management team
3. Reorganization of functional departments
4. Relocation/consolidation of headquarters operations
5. Outsourcing of the manufacturing operations
6. Sale of the Virginia manufacturing facility
7. Streamlining product lines
8. Achievement of overall cost savings and efficiencies

CONSOLIDATION, REORGANIZATION AND RELOCATION

During 2000, each of the four strategic business units within Comdial: CCC, KVT,
CES, and CBCC/Array, had its own engineering, finance, information technology
("IT"), marketing and administrative functions. Comdial determined that this
structure was not sufficiently effective with respect to the Company's strategic
objectives. Consequently, from a functional standpoint, CCC, KVT, and CES were
combined under the Comdial Corporate umbrella during the first quarter of 2001.
In conjunction with this combination, management and functional departments were
also  reorganized to create a more  efficient use of common  corporate
infrastructure and eliminate redundant functions.

After approving the Plan, management immediately began to identify potential
outsourcing partners and downsize its current workforce. Pursuant to the Plan,
152 employees were terminated effective December 15, 2000, another 222 employees
were notified as of December 28, 2000 that their positions would be eliminated
during 2001. As of December 31, 2001 a total of 342 employees have been
terminated as part of the Plan. (See Note 15 to the Consolidated Financial
Statements).

The relocation and consolidation of certain functions from Virginia to Florida
was substantially completed during the first quarter of 2001. The Company
achieved significant cost savings during 2001 due to the consolidation of
administrative, information technology, finance, and sales and marketing
functions.

OUTSOURCING MANUFACTURING OPERATIONS

In January 2001, the Company entered into an agreement with an overseas
manufacturer to produce a cost-competitive small key system to supplement the
Company's offerings.

In  February 2001,  the  Company  entered  into an  agreement  with a  domestic
manufacturer to outsource certain of its existing manufacturing  operations.
During 2001, the Company transitioned a significant portion of its manufacturing
operations to this manufacturer.

In August of 2001, the Company added a third manufacturing outsource partner,
also foreign-based, to allow for increased capacity of its telephone
manufacturing requirements.

                                       4
<PAGE>


At the present time, the Company believes it has a sufficient number of
outsource manufacturers. However, the Company will continue to look at
alternative manufacturers to ensure it receives the best product value for its
customers.

The Company does not own any equity interests or provide any form of debt
financing to its outsourcing partners.

SALE OF VIRGINIA FACILITY

On March 9, 2001,  the Company sold its  Virginia  manufacturing  facility in a
sale leaseback.  The Company is leasing  approximately  120,000  square  feet of
space for low volume board production,  light assembly work, warehousing,
engineering, and technical services functions under a three year agreement.

STREAMLINING PRODUCT LINES AND COST SAVINGS

During the fourth quarter of 2000, the Company undertook a rigorous analysis of
the number of telephone and circuit boards it marketed to its customers. As a
result, Comdial has significantly reduced the number of telephone models
available by discontinuing items with low demand and/or redundant items. Low
demand versions of circuit cards used in the FX(tm) and DXP(tm) systems were
also eliminated. During 2001, Comdial streamlined the number of telephones
offered in conjunction with its digital systems from over 50 models to 8.
Likewise, the number of key system model numbers was also reduced from thirteen
to six. The Company has benefited as a result of this streamlining. More volume
concentrated on fewer products has reduced product cost and inventory levels,
while making the product lines easier to configure, warehouse and sell.

EVENTS OF SEPTEMBER 11, 2001 AFFECT COMDIAL SALES

On September 28, 2001, management and the Board approved and executed a second
restructuring plan in response to the downturn in the economy and the events of
September 11, 2001. This second plan was designed to achieve certain operational
and financial efficiencies throughout the organization.  The Company also
developed a contingency plan to quickly react if the disaster proved to cause
more serious economic effects to the company.

Significant terms of the second plan included downsizing the workforce in both
the Sarasota and Charlottesville  locations.  Accordingly,  reductions were made
across several departments including sales, finance, manufacturing, engineering,
and technical support. Thirty employees in total were notified that their
positions had been eliminated on September 28, 2001.

During the month of October, it became clear to management that further
restructuring was required and that the Company's contingency plan must be
implemented. Accordingly, a third restructuring plan was announced in November
2001. The Company decided to make some fundamental changes to the engineering
department, as well as cut expenses further in light of the events of September
11, and the effects that this event had on the sales of its products. The
Company announced that it would be outsourcing the entire production and
assembly work presently being conducted in Charlottesville. The Company
announced it would eliminate more than 75 positions between November 2001 and
April 2002 as it totally exits manufacturing.

                                       5
<PAGE>

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Some of the statements included or incorporated by reference into our
Securities and Exchange Commission filings, press releases, and shareholder
communications and other information provided periodically in writing or orally
by our officers, directors or agents,  including this Form 10-K, are forward-
looking statements that are subject to risks and  uncertainties. These forward-
looking statements are not historical facts but rather are based on certain
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "may", "will", "anticipates", "expects", "intends",
"plans", "believes", "seeks" and "estimates" and variations of these words and
similar expressions are intended to identify forward-looking statements.  Some
of the risks and uncertainties include, but are not limited to:

     .  any inability to stem continued operating losses and to generate
        positive cash flow;

     .  any adverse impact of competitors' products;

     .  delays in development of highly complex products;

     .  lower than anticipated product demand and lack of market acceptance;

     .  adverse market fluctuations caused by general economic conditions;

     .  any negative impact resulting from the outsourcing of manufacturing and
        the continued risks associated with outsourcing;

     .  any lack of success of our restructuring plans;

     .  any inability to meet our restructured debt obligations to Bank of
        America, N.A., including, without limitation, compliance with all
        applicable covenants;

     .  any inability to renegotiate on favorable terms or otherwise meet our
        obligations to suppliers and other creditors;

     .  the risk of de-listing from the Nasdaq SmallCap Market;

     .  unfavorable outcomes in any pending litigation;

     .  any inability to form or maintain key strategic alliances;

     .  our inability to raise capital when needed;

     .  any continued reductions in our liquidity and working capital;

     .  the significant dilutive effect on existing stockholders of issuances of
        stock to Bank of America and other creditors;

     .  any adverse impact to the market of our stock if Bank of America elects
        to sell a  material amount of shares;

     .  any negative impact resulting from our downsizing of our workforce;

     .  unanticipated liabilities or expenses;

     .  the availability and pricing of parts and components;

     .  other risks detailed from time to time in our filings with the
        Securities and Exchange Commission.

These risks could cause our actual results for 2002 and beyond to differ
materially from those expressed, implied or forecasted in any forward-looking
statement made by, or on behalf of, us. We undertake no obligation to publicly
update or revise the forward-looking statements made in this Form 10-K to
reflect events or circumstances after the date of this Form 10-K or to reflect
the occurrence of unanticipated events.

                                       6
<PAGE>

OUTSOURCING RISKS

As part of its restructuring program, Comdial outsourced substantially all of
its manufacturing requirements.  Outsourced manufacturing is carried out in
three principal locations: Asia, Mexico and Florida.  It is expected that all
manufacturing will be outsourced by the end of the second quarter of 2002.
Outsourcing carries certain risks which include, but may not be limited to: the
financial solvency, labor concerns and general business condition of Comdial's
outsourcing contractors, political, legal and economic conditions, language and
cultural barriers, trade barriers, currency fluctuations and changes in
regulatory requirements related to foreign locations, risks of fire, flood or
acts of God affecting manufacturing facilities and Comdial's ability to meet its
financial obligations to our outsourcing contractors.  In addition, Comdial's
outsourcing contractors acquire component parts from various suppliers.  Similar
risks are involved in such procurement efforts.  Due to the Company's dependency
on outsourced manufacturing and the inherent difficulty in replacing outsourced
manufacturing capacity in an efficient or expeditious manner, the occurrence of
any condition preventing or hindering the manufacture or delivery of
manufactured goods by any one or more of its outsourcing contractors could have
a material adverse effect on Comdial's business and financial results.

INDUSTRY BACKGROUND

Comdial's primary business and product offerings fall into three categories: (1)
voice switching systems, (2) voice messaging systems, and (3) computer telephony
integration ("CTI") applications that incorporate voice messaging and voice
processing products with advanced computer technologies and/or Internet
applications. All of these businesses are focused on small- to medium-sized
offices, are highly competitive and are influenced by trends and events in
technology, regulation and the general economy.

VOICE SWITCHING SYSTEMS

Comdial produces and markets digital voice switching systems known as key/hybrid
systems.  Historically, voice-switching systems were categorized  as  either
key/hybrid systems or Private Branch Exchanges ("PBXs").  Key/hybrid systems are
typically purchased by small- to medium-sized offices of small to large
organizations with 3 to 500 employees per location or branch office, while
larger businesses with more than 500 employees in one location typically
purchase PBXs.  However, design advances in key/hybrid systems and PBXs in
recent years have blurred the distinction between the two systems.  As
key/hybrid systems continue to evolve, they increasingly encroach on the domain
of the traditional PBXs, and vice versa.

A basic business telephone system consists of: (a) a central switching unit, (b)
telephone instruments, (c) associated wiring and connection hardware, (d) system
software,  and  (e)  adjunct  devices  such  as  facsimile  machines  and  voice
processing systems.  Voice switching systems are measured in terms of "ports". A
port is an access  point on the switch to an outside  trunk or terminal  device.
Examples of terminal devices include telephones, facsimile machines, modems, and
voice mail ports. Examples of trunks include standard business lines and digital
lines such as ISDN and T-1,  as well as other  types of  circuits  provided by a
telephone company or an alternative service provider.  With the proliferation of
modems, facsimile machines, and voice mail systems, the demand for port capacity
in key/hybrid systems has grown.

Due to the voice and data convergence phenomenon, data access to Internet
Protocol (IP) networks and the Internet as a type of access point is becoming
increasingly important in voice switching systems. As part of this technology
change the emergence of IP-based terminal devices such as IP telephones are
becoming an important component in the Company's product portfolio.  Data access
points are available for trunks, terminal devices and networking.  The Company
accomplishes this with an IP media board that supports voice over IP (VoIP)
protocols.  The Company has developed an IP telephone, which is currently
manufactured by one of its outsourcing partners.

                                       7
<PAGE>

The 2001 enterprise communications market size dramatically decreased by 24.3
percent in terms of number of systems shipped. Comdial's systems shipped
remained approximately flat year over year at -0.2 percent. The first half of
2001 resulted in a 12.6 percent decrease, while Comdial improved in the second
half by increasing units shipped by 14.3 percent year over year. For the year,
Comdial increased its market share by approximately 31.9 percent from
approximately 4.1 percent to 5.5 percent. The Company is ranked seventh behind
Avaya, Panasonic Company, Nortel, NEC, Inter-tel, and Toshiba, according to the
Phillips Infotech, Enterprise Communications Fourth Quarter 2001 Report.

The domestic demand for traditional key/hybrid switching systems, as projected
by Phillips Infotech, a leading industry market analyst firm, is expected to
decline 27.6 percent, decline 4.1 percent, and increase 3 percent in 2001, 2002,
and 2003, respectively.  Per the same firm, the key/hybrid market is expected to
generate revenues of approximately $1.53 billion, $1.45 billion, and $1.48
billion in 2001, 2002, and 2003, respectively.

The PBX switching systems market, where Comdial has no product offerings, is
expected to decline 27.2 percent, decline 5.1 percent, and remain unchanged in
2001, 2002, and 2003, respectively.  The PBX market is expected to generate
revenues of $2.89 billion, $2.71 billion, and $2.66 billion in 2001, 2002, and
2003, respectively, according to the Phillips Infotech, Enterprise
Communications Third Quarter 2001 Report.

The IP PBX switching market in terms of stations shipped, a market that Comdial
introduced new products to in late 2001, is expected to grow 202 percent, 40.8
percent, and 47.8 in 2001, 2002, and 2003, respectively.  This projected growth
translates into revenues of approximately $757 million, $984 million, and $1.37
billion in 2001, 2002, and 2003, respectively, according to the Phillips
Infotech, Enterprise Communications Third Quarter 2001 Report.

The year 2002 and 2003 projected declines in the key/hybrid and PBX markets are
primarily due to the adoption of IP PBX systems.  In 2001, Comdial gained market
share in the key/hybrid market and started selling in the emerging IP PBX
segment.  The Company believes it is well positioned to compete effectively in
both markets.  The Company's FX IITM product is classified as a converged IP
telephony system and provides customers with the option of deploying circuit
switched and/or packet switched solutions.  The FX II is Comdial's key entry to
the projected high growth IP PBX market.

                                       8
<PAGE>

VOICE MESSAGING

As the market for voice processing systems has matured, a new variation known as
"unified messaging" has evolved. Unified messaging provides a means of storing
voice and fax messages along side email messages in a single location (such as
the "inbox" associated with Microsoft(R) Outlook(R) in-box). Unified messaging
enables a system user to play voice mail messages (using the sound capabilities
of their PC) at the same time the user is picking up their email messages. The
user can also annotate, store and forward voice messages in the same manner as
e-mail messages. Unified messaging also allows the user to listen to voice
messages via the telephone and also listen to e-mail messages via the telephone
through the use of sophisticated text-to-speech software. The unified messaging
"in-box" is a multimedia store for voice, fax and e-mail messages.  In 1999,
Comdial introduced iNTerchange(TM), its unified messaging system combining voice
mail, fax, and e-mail. Comdial's iNTerchange unified messaging system is
available in several sizes and configurations. iNTerchange integrates with
Microsoft(R) Exchange and other popular e-mail servers. According to IDC's
February 2001 press release, the number of UM mailboxes is projected to increase
from 1 million in 1999 to more than 38 million in 2004. Vendor revenues in this
market are expected to jump from $132 million to nearly $2 billion during this
time.  iNTerchange, in combination with Corporate Office(TM), Comdial's mid-
market offering, and Debut(TM), its entry-level product, constitute a complete
range of voice processing solutions. These products provide voice processing for
applications ranging in size from 2 to 64 ports. Most Comdial sales are in the 2
to 8 port range, corresponding with the needs of small to mid-size offices that
are Comdial's primary markets.

According to Phillips Infotech in terms of systems shipped, for the year ending
2000, Comdial with its subsidiary key voice was ranked fourth with 6.4 percent
market share behind Avays, Nortel, and Active Voice.  For the first half year
2001 (year-end 2001 figures have not yet been released), the Company was ranked
sixth with 4.3 percent market share behind Avays, Nortel, Panasonic, NHC (via
its acquisition of Active Voice), and Toshiba. Comdial believes that its second
half performance will boost its voice mail market standings.

COMPUTER TELEPHONY INTEGRATION SOLUTIONS AND OTHER

Comdial has also developed sophisticated desktop software applications designed
to run in a Microsoft Windows(R)/Outlook environment. Examples of these
applications include Impact Attendant(TM), Impact Group(TM), and Impact
Call(TM). All of these applications enable a PC user to visually monitor and
control (transfer, hold, etc.) phone calls. The call control capabilities of
these desktop applications are enabled by Comdial's "Enterprise" CTI link and
WideOpen Office(TM), a server based program. The market for CTI products is
very diverse and difficult to quantify. Most of Comdial's CTI sales derive from
sales of the Company's switching and/or voice messaging products. Comdial has
also  developed products targeted at vertical markets. Two examples include the
"Concierge(TM)", a hotel/motel targeted market, and "Avalon(TM)", an assisted
living targeted market. Comdial sold its Avalon business in 2001 (discussed in
greater detail in the following section) to a company focused exclusively in the
health care market, who will now be a reseller of other Comdial equipment.

STRATEGY
Comdial seeks to expand sales and profits by:

  1. Focusing on its core competencies in the switching and messaging markets
     and introducing feature-rich and competitively priced products;
  2. Leveraging the core competency in communications technology to develop and
     introduce advanced IP telephony products and solutions;
  3. Leveraging its expertise in messaging and offering technologically advanced
     solutions like unified messaging at a competitive price point;
  4. Increasing profitability and penetration of government and national account
     opportunities through a channel-centric strategy versus the Company's
     direct model;
  5. Expanding voice processing software sales in international markets; and
  6. Adding recurring revenue opportunities by offering bundled solutions to
     users, which integrate Comdial hardware and software products with various
     service offerings.

                                       9
<PAGE>

PRODUCT OFFERINGS

Comdial currently offers digital business telephone systems, wired and wireless
terminals, computer and telephony software applications, voice processing and
unified messaging systems, Voice Over Internet Protocol ("VoIP"), and other
products along with a variety of product enhancements. Comdial believes that it
offers a competitive range of products enabling dealers to meet differing price
and feature requirements. Comdial strives to introduce new products that meet
the needs of a changing market.

Comdial currently provides the newly released DX-80(TM) and FX II(TM), plus the
Impact FX(TM), DXP and DSU(TM) switching products. In 2001, Comdial introduced
the DX-80 digital key system and the FX II digital key system. The DX-80 and the
FX II are expected to continue to cannibalize sales of the DXP and DSU, which
Comdial plans to retire in 2002.  The DX-80 is positioned for the lower end of
the small to medium office market and provides a unique set of features at a
very competitive price coupled with easy installation and operation.

The FX II appeals to a broad range of customers due to its robust advanced
feature set and scalability. Businesses with as few as 10 people can afford the
FX II. The FX II is Comdial's most current and sophisticated switching platform.
The FX II is expandable to 560 ports. The FXII differs from Comdial's other
switching platforms in that it is more "open" and more software-intensive. The
FX II is a rack mountable version of the FX platform. FX II is designed to
provide a lower initial cost of entry for customers who desire the sophisticated
features including IP gateway functionality, support for IP telephones and
digital trunk capabilities.  The rack mount design provides convenient
installation alongside other rack-mounted IT equipment. Alternatively, the FX II
can be wall mounted.

The introduction of the FX II provides Comdial with a competitive, feature-rich
product offering that is scaleable though chassis expansion and networking,
thereby servicing a broader range of customer size segments, which should result
in improved sales.

The FX II supports fiber connectivity for chassis expansion. Fiber connectivity
provides a fiber optic link between cabinets for optimal equipment placement in
environments that can benefit from multiple cabinets in the same application,
but separated by up to 2500 meters. Typical applications for fiber connectivity
are campus environments and multi-level buildings.

The FX II's networking capabilities allow multiple locations to share one
numbering plan and feature transparency throughout the network. This feature is
important for applications where multiple locations require total integration of
the communications system. For example, the FX II network design has enjoyed
success in the campus environment of educational facilities.

In addition to the networking feature based on dedicated telecom facilities, the
FX II also supports IP networking. IP networking allows the networking of
switching systems over data facilities. This is important as voice and data now
can share the same wide area or local area network reducing the total cost of
ownership of the system by leveraging the existing facilities instead of
separate facilities for data and telecom. Comdial provides for the use of
multiple compression algorithms to best suit the users application and bandwidth
requirements.

Comdial offers the iNTerchange(TM) unified messaging, Corporate Office, and
Debut voice messaging systems. Comdial also provides CTI based products that
work in conjunction with the FX and or DXP. These CTI products are "Concierge"
for the hospitality industry, Enhanced Customer Service features for informal
call centers, and QuickQ, which provides automatic call distributor ("ACD")
functionality designed for more sophisticated call centers. Sales of these
products constitute the majority of Comdial's CTI sales revenue.

                                       10
<PAGE>

PRODUCT DEVELOPMENT / NEW PRODUCTS

Comdial currently has a number of new products and product enhancements either
in testing or scheduled for release during 2002. These include: new IMAP4
protocol support for iNTerchange, an enhanced IP telephone, a new voice
processing platform for the DX-80, more advanced call center functionality for
our Enhanced Customer Service feature, a new wireless telephone, a new CPU
enhancement designed for advanced next generation functionality, enhancements to
its line and station cards, as well as a next generation, open-standards-based
product designed around Session Initiation Protocol ("SIP") and Microsoft's .NET
initiative.

Throughout 2001 and beyond, Comdial plans to continue to evolve IP-based
capabilities for both the switching and voice processing product lines. The
Company plans to continue to enhance new technologies and incorporate them into
existing products based on the maturity of the technology and customer perceived
value-add.

PRODUCT DISTRIBUTION

The majority of Comdial's products are sold to the end-user through a network of
Comdial authorized dealers. The Company has authorized dealers in every major
metropolitan area in the U.S. These dealers purchase Comdial products from
Comdial-authorized distributors. Use of the distributors enables Comdial to
minimize receivables credit risk, sales administration and inventory. The
distributors also make Comdial products widely available on a same-day or next-
day basis. Comdial dealers benefit from having multiple sources from which they
can obtain product on short notice, which keeps down the cost of the product to
dealers and minimizes the need for dealers to maintain their own inventory.

Comdial is in the process of shifting most of its products into the distribution
channel. In January 2002, it introduced all of its voice messaging and unified
messaging products to the distributors as well as many telephony products that
Comdial sold direct. This enhances the position of Comdial with respect to its
warehousing, customer credit exposure and simplifies its dealer and rebate
programs. In addition, Comdial is engaged in discussions with its distributors
regarding how to migrate its direct national accounts and government sales to
the distribution channel. This strategy will further reduce Comdial's
receivables risk and increase geographic scope and coverage.

STRATEGIC ALLIANCES

Comdial plans to continue to evaluate strategic alliances where it can either
generate more customers or enhance its product lines and utilize its
distribution power through the dealer channel.


  (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

  During the fiscal years ended December 31, 2001, 2000, and 1999, substantially
all of Comdial's sales, net income (loss), and identifiable net assets were
attributable to the telecommunications industry. Additional information is
included in Note 12 to the consolidated financial statements.

                                       11
<PAGE>

Product Sales Information:

The following table presents  certain  relevant  information  concerning
Comdial's business segments for the periods indicated:

<TABLE>
<CAPTION>

-----------------------------------------------------------
<S>                            <C>       <C>       <C>
Years Ended December 31,
(In thousands)                    2001      2000       1999
-----------------------------------------------------------

-----------------------------------------------------------
Business segment sales:
Switching                      $53,511   $49,545   $ 81,868
Messaging                       15,183    28,014     38,907
CTI and other                    7,473    12,005     19,982
                               -------   -------   --------
            Net sales (a)      $76,167   $89,564   $140,757
                               =======   =======   ========
-----------------------------------------------------------
</TABLE>

(a) During 2001, the Company classified certain sales rebates and incentives as
a reduction of revenue. Previously, these incentives were classified as a
selling, general and administrative expense. The Company has also reclassified
such amounts for fiscal years 2000 and 1999 to conform to the 2001 presentation.
These and other reclassifications had no effect on operating or net income.

(C) NARRATIVE DESCRIPTION OF BUSINESS

PRODUCTS

Comdial has strategically changed its product portfolio. While the new product
portfolio consists of fewer product SKUs, it represents, in management's
opinion, the strongest most scalable product lineup ever offered by Comdial. By
significantly reducing the number of similar products and focusing on increasing
volume and lowering product costs, the Company intends to strengthen its ability
to provide stable profit margins in the future. We believe this also enhances
the Company's competitive position. This strategic product shift was the key
benefit of the restructuring plans.

Comdial offers a variety of communications products, including  switching
products, messaging systems, CTI solutions and other software applications.
Comdial's telecommunications products meet the requirements of three agencies:
(1) the Federal Communications Commission ("FCC"), (2) an independent laboratory
approved by the Occupational Safety and Health Act Commission ("OSHA") to
produce safety standards, and (3) a nationally recognized test laboratory that
performs product evaluations. Selected products are also registered with the
Canadian government and are Canadian safety certified.

SWITCHING
The following products comprised the majority of Switching sales:

The FX II is Comdial's most current and sophisticated switching platform and is
expandable to 560 ports. Since its introduction of the original FX in 1997,
Comdial has continually enhanced the FX Series. The FX II differs from Comdial's
other switching platforms due to its open, software-enhanced, scaleable
architecture. The introduction of the FX II increases Comdial's competitiveness
for a broader range of applications, thus expanding its market opportunity,
which should in turn produce incremental sales.

The DXP system, originally introduced in 1992, has had several major upgrades
over the years. The DXP was the first Comdial digital switching platform that
expanded to 560 ports. The Company expects sales of the FX II to continue
replacing sales of the DXP during 2002.

                                       12
<PAGE>

The DSU (Digital Service Unit) system, originally introduced in 1990, has been
the mainstay of Comdial's key system offering. The DSU has been used as the
platform for three iterations of key system products: the Impact (using Impact
phones), Impact SCS (using Impact SCS phones) and the Impression(TM). The
Impression was discontinued during first quarter of 2001. The Company expects
sales of DX-80 and FX II to continue replacing sales of the DSU during 2002.
Impact telephones were introduced in 1992. These telephones offer a variety of
features, including an interactive liquid crystal display ("LCD"), programmable
feature keys, three color lighted status indicators, and subdued off-hook voice
announce for receiving intercom calls while on a telephone call. The phones are
offered in a variety of models, distinguished by the number of programmable
buttons, an optional display, and an optional speakerphone. Impact phones can be
used with the FX, DXP and DSU switching platforms, thus providing customers with
investment protection as they upgrade from one switch to another.

Impact SCS was introduced in 1997. Impact SCS retains many of the original
Impact telephone models, but has a new design and other distinguishing
capabilities such as a full-duplex speakerphone model, simultaneous voice and
data, large screen display and adjustable viewing angle. Impact phones can be
used with the FX, DXP and DSU switching platforms, again offering customers
investment protection when upgrading their switch.

The DX-80 is a new all-in-one digital key system with advanced features
including voice mail, live call screening, auto attendant, plus others. This new
system is competitively priced and has resulted in an increase in market share
in the small office market segment. The DX-80 was released in Q1 of 2001. In
spite of a difficult year for equipment sales, the DX-80 performed well in 2001.

MESSAGING

Debut was introduced in 1998 to meet the needs of small offices seeking basic
voice processing capabilities at an attractive price.

Corporate Office(TM), introduced in 1996, is the trade name of a PC-based voice
processing system. The product provides all standard voice processing features
such as auto attendant, voice store and forward, multiple greetings, and
individual voice mail boxes. Advanced features such as fax tone detection, audio
text (interactive response to user touch-tone commands), and Visual Call
Management(TM) (the ability to view voice messages from a PC)  are also
available. Corporate Office can be integrated with Comdial's digital telephone
systems so that display messages on liquid crystal display ("LCD") terminals
prompt user operations. The Company offers similar integration packages for
telephone  systems made by other companies. Corporate Office is offered  in 4 to
64 port configurations. Corporate Office is available in a variety of form
factors and utilizes various Microsoft operating systems. Voice storage capacity
is virtually unlimited, which is an advantage of PC-based design.

iNTerchange is a unified messaging system that was introduced in the third
quarter of 1999. This system was specifically designed to meet both small and
large company needs. It is a Microsoft Windows 2000(TM) based unified messaging
system that fits into any office's local area network ("LAN") and combines voice
mail, fax and e-mail capabilities. The system provides a way to better
prioritize messages with more efficient alternatives for receiving and
responding to each type of electronic messaging.

                                       13
<PAGE>

COMPUTER TELEPHONE INTEGRATION ("CTI") SOLUTIONS AND OTHER SOFTWARE APPLICATIONS

QuickQ ACD, introduced in 1994, is an automatic call distributor ("ACD"),
designed for call center use. The QuickQ ACD answers and distributes incoming
calls rapidly and  efficiently,  helping to assure  maximum call center
productivity and superior customer response levels. The Company also has a call
center product for informal call centers called Enhanced Customer Service
("ECS"), which is integrated into Comdial's messaging systems. Informal call
centers are call centers that do not require some of the added sophistication of
QuickQ, but require sophisticated call routing and queuing. ECS provides an
entry-level call routing and queuing for informal call centers as part of our
messaging platform. The Company is enhancing ECS and expects to create a
superior version later in 2002.


DISCONTINUED VERTICAL MARKET PRODUCTS

Due to the restructuring of the business, the Company has decided to exit the
direct sales of Avalon vertical market application for the assisted living
market. The Company sold the Avalon business assets to Fidelity Telealarm in
October 2001.  It is expected that Fidelity will resell Comdial products
alongside its solutions. The Company has now completely exited this business,
which had negative financial results.

SALES AND MARKETING

Comdial markets its products through both direct and indirect channels. Indirect
channels include both one-tiered and two-tier distribution. Comdial's primary
channel of distribution to U.S. and Canadian markets is through five wholesale
distributors, which in turn, resell to hundreds of independent dealers.

Three supply houses collectively account for more than 65% of Comdial's net
sales. These are ALLTEL Supply, Inc. ("ALLTEL"), Graybar Electric Company, Inc.
("Graybar"), and Sprint/North Supply, Inc. ("North Supply"). In 2001, net sales
to ALLTEL, Graybar, and North Supply amounted to approximately $9.1 million
(12%), $29.8 million (39%), and $11.0 million (14%), respectively.

Comdial has established four classes of dealers that purchase Comdial's products
from distributors for sale to end-users. These are Platinum, Gold, Associate,
and General Interconnect. Comdial offers an incentive package for Platinum and
Gold dealers, including exclusive access to certain products, cash rebates
related to dealer purchase levels, cooperative advertising allowances, a measure
of territorial protection, toll free assistance, and training. Platinum and Gold
dealers have sales quotas, and Comdial's sales department monitors their
performance against these targets. Associate and General Interconnect dealers
purchase Comdial's products on an as-needed basis, and are not rewarded through
product rebates. Associate and General Interconnect dealers do not have quotas
but also do not have access to certain "Dealer Only" products, a reduced
cooperative advertising allowance, and other preferred dealer services that are
offered by Comdial.

Comdial supports its existing dealers and seeks to attract new dealers through
direct selling efforts, joint sales activities with distributors, and other new
dealer recruitment tactics.

Comdial has defined thirteen geographic sales territories, each of which include
a regional sales manager ("RSM") who is responsible for recruiting new dealers,
as well as managing existing dealers. Dealers are supported through thirteen
dedicated inside sales representatives, direct mail, and local product seminars
often organized by distributors. To stimulate demand, each RSM  makes joint
sales calls with dealers to end-users and trains dealer sales personnel in
product benefits. Product specialists at Comdial are available to help engineer
complex configurations and solve any technical problems.

                                       14
<PAGE>

Comdial's dealers sell Comdial's products to end-users and provide after-sale
support. Comdial maintains a technical staff devoted to dealer technical
support. Comdial also generally provides a limited warranty on elements of its
products up to a maximum of 24 months.

Other indirect channels include OEM relationships, international sales, and
dealer direct sales for specific products.

In recent years, Comdial initiated a national accounts marketing program to
market its products to large multi-location end-users. The branch offices and
retail outlets that employ 5-500 employees are a good fit with Comdial's product
line. The program allows end-users to contract with one entity (Comdial or
designated partner) for sales, while achieving local installations and
maintenance from Comdial's network of independent dealers. This program is also
a key delivery vehicle for sophisticated computer telephony solutions sales that
often require advanced custom integration and superior knowledge and
understanding of end-user communications and business objectives. The National
Accounts Marketing Program allows Comdial to work directly with end-users to
assure that the best combination of Comdial and, if necessary, third party
products are incorporated into the final solution. Comdial employs dedicated
personnel to close national accounts' contracts, yet, leverages its regional
sales managers and dealer network to identify prospects.

Because the bulk of Comdial's sales are made under short-term sales orders
issued by customers on a month-to-month basis rather than under long-term supply
contracts, backlog is not considered material to Comdial's business.

ENGINEERING, RESEARCH AND DEVELOPMENT

Comdial believes that it must continue to introduce new products and enhance
existing products to maintain a competitive position in the marketplace.
Comdial's engineering department, working in collaboration with the marketing
and manufacturing departments, is responsible for design of new products and
enhancements. Significant amounts of engineering expenditures are dedicated to
new product development, with the balance used for cost reductions and
performance enhancements to existing products. Comdial strives to ensure
research and development resources are spent on projects that provide the best
return and have the most strategic value. This may at times mean utilizing
resources outside the company on a contract basis or partnering with other
companies to bring products and/or features faster to the market place.

Research and development costs for the fiscal years ended 2001, 2000 and 1999,
comprise the majority of engineering, research, and development costs, which
were $7.6 million, $6.3 million and $9.7 million, respectively. Comdial is
unable to segregate and quantify the amount of research and development costs
from other engineering costs for such fiscal years.

Some of the research and development costs associated with the development of
product software have been capitalized as incurred. The accounting for such
software follow the provisions of Statement of Financial Accounting Standards
("SFAS") No. 86. The amounts capitalized in 2001, 2000 and 1999 were $2.8
million, $4.4 million and $4.7 million, respectively. The amortization expense
of capitalized software development costs in 2001, 2000 and 1999 were $3.1
million, $3.3 million and $2.4 million, respectively.

                                       15
<PAGE>

MANUFACTURING AND QUALITY CONTROL

Comdial has streamlined its product offerings in 2000 and 2001 by eliminating
products and models that were redundant and/or low volume, thereby simplifying
outsourcing and reducing the associated risk. This action also has the added
benefit of concentrating more volume on the remaining models, which is expected
to have a positive effect on cost, efficiency and quality. During 2001, Comdial
successfully completed substantially all of its outsourcing objectives. The
Company believes that outsourcing the manufacturing of its products will return
benefits in the form of lower costs, higher margins and competitively priced
products. While 2001 has been a restructuring year for the Company, the
outsourcing of the majority of its products has already resulted in significant
benefits to the Company. The Company has experienced minor disruptions in its
supply chain during this process. The quality of the products produced by its
outsourcing partners has been good and the Company expects to maintain or
improve the quality over time.

COMPETITION

The market for Comdial's switching and voice-processing products is highly
competitive. Comdial competes with over 25 suppliers of small business telephone
systems, many of which have significantly greater resources. Examples are Avaya,
Nortel Networks, Cisco, 3Com, NEC, Inter-tel, Vodavi, Panasonic, and Toshiba
Corporation. Key competitive factors in the sale of telephone systems and
related applications include performance, features, reliability, service and
support, name recognition, distribution capability, and price. Comdial believes
that it competes favorably in its market with respect to the performance,
features, reliability, distribution capability, and price of its systems, as
well as the level of service and support that Comdial provides. In marketing its
telephone systems, Comdial also emphasizes system expandability, quality, and
high technology features including the IP and CTI capabilities of its products.

Comdial expects that competition will continue to be intense in the markets it
serves, and there can be no assurance that Comdial will be able to continue to
compete successfully in the marketplace or that Comdial will be able to maintain
its current dealer network.

INTELLECTUAL PROPERTY

From time to time,  Comdial has been subject to proceedings  alleging
infringement by Comdial of  intellectual  property  rights of  others.  Such
proceedings  could require  Comdial  to expend  significant  sums in
litigation,  pay  significant damages,  develop  non-infringing   technology,
or  acquire  licenses  to  the technology that is the subject of the asserted
infringement,  any of which could have a material adverse effect on Comdial's
business.  Moreover,  Comdial relies upon  copyright,  trademark,  patents  and
trade  secret  protection  to protect Comdial's  proprietary  rights in its
products.  There can be no assurance  that these  protections  will be  adequate
to deter  misappropriation  of  Comdial's technologies or independent third-
party development of similar technologies.

                                       16
<PAGE>

The business telecommunications industry is characterized by rapid technological
change.  Industry participants often find it necessary to develop products and
features similar to those introduced by others, with incomplete knowledge of
whether patent  protection  may have  been  applied  for or may  ultimately  be
obtained by competitors or others. The telecommunications manufacturing industry
has historically witnessed  numerous  allegations of patent  infringement  and
considerable  related litigation among competitors.  Comdial itself has received
claims  of  patent   infringement  from  several  parties  that  sometimes  seek
substantial sums. In response to prior infringement claims, Comdial has pursued
and  obtained   nonexclusive  licenses  entitling  Comdial  to  utilize  certain
fundamental  patented  functions  that  are  widely  licensed  and  used  in the
telecommunications  manufacturing industry. These licenses will either expire at
the end of the patent  license or the end of an  agreed-to  period.  The Company
holds  certain  licenses  with  Avaya Inc., however, at this time the Company
has informed Avaya it is not in a position to pay the fees that Avaya claims are
owed pursuant to the licenses.

EMPLOYEES

As of December 31, 2001,  Comdial,  including  subsidiaries,  had 258  full-time
employees, of whom 51 were engaged in manufacturing,  35 in engineering, 115 in
sales and support, and 57 in general management and administration. During 2000
and 2001, Comdial initiated restructuring   programs   that  included
outsourcing  the manufacturing of most  of its products.  As a result, the
Company  experienced a reduction in its workforce by 303 employees during 2001.
During the first half of 2002, Comdial expects to reduce the workforce by more
than 50 people.  Continued assessment of cost efficiencies may necessitate
additional headcount reductions.

ITEM 2.  PROPERTIES

In March 2001, the Company sold its Charlottesville,  Virginia,  headquarters
and  manufacturing  facility to Seminole Trail Properties,  LLC ("STP"). The
purchase price for the property was $11.4 million, all of which was collected in
2001.

The Company is leasing  back a portion of the  facility through  August 31,
2003,  for low volume  board  production,  light  assembly, engineering,  and
technical services functions.  Lease payment obligations total $2.6 million over
the 30 month lease term.

The  total  gain on the  sale of the  facility  amounted  to  $5.1  million.
The Company  immediately recognized a gain of $2.9 million in 2001 which is the
amount by which the gain exceeds  the  present  value of the  minimum  lease
payments  to be made by the Company from the closing date through August 30,
2003.  The remaining amount of the gain of $2.2  million has been  deferred  due
to the  leaseback  and is being amortized over 30 months, the term of the lease,
as a reduction of rent expense. During 2001, the Company amortized  $1.1 million
as a reduction of rent expense.  As of December 31, 2001, the balance of the
deferred gain amounts to $1.1 million.

In addition, the Company leases approximately 60,000 square feet of office and
warehouse space in Sarasota, Florida, which serves as its corporate
headquarters.  This lease expires in January 2010.

                                       17
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

Comdial currently and from time to time is involved in litigation arising in the
ordinary course of its business.  Those that the Company believes may have a
significant impact on it are described below.  Comdial can give no assurance
that the resolution of any particular claim or proceeding would not have a
material adverse effect on its results of operations, cash flows or financial
condition.

On March 5, 2001, William Grover, formerly a senior vice president of Comdial,
filed suit in state court in Charlottesville, Virginia alleging breach of an
employment contract and defamation, and seeking compensatory, punitive and
exemplary damages in the total amount of $1.9 million, plus interest.  Among
other things, Mr. Grover claims that the for-cause termination of his employment
was unjustified and that he is therefore entitled to all benefits accrued to him
pursuant to the Company's executive retirement plan.  The Company removed this
case to the federal district court for the Western District of Virginia, because
Mr. Grover's state law claims against Comdial are preempted by federal law,
specifically ERISA.  Presently, Mr. Grover is seeking to remand the case back to
state court.  Comdial believes that it has adequate substantive and procedural
defenses against all claims made against Comdial in this matter.

On October 5, 2000, William G. Mustain resigned as president and chief executive
officer of Comdial.  On the same date, Comdial agreed to pay Mr. Mustain his
normal salary for the remainder of 2000 plus severance in the amount of $0.1
million per year for three years beginning on January 1, 2001.  Mr. Mustain was
also entitled to be paid approximately $1.7 million in three installments over a
15 month period plus certain fringe benefits under Comdial's Retirement Benefit
Restoration Plan (the "Plan").  In 2001, Comdial made the initial payment of
$0.6 million under the Plan.  However, on June 30, 2001, Comdial notified Mr.
Mustain that it would not make payment of the second $0.6 million installment
due under the Plan because of its financial condition, as permitted under the
terms of the agreement with Mr. Mustain.  On December 27, 2001, Comdial reached
agreement with Mr. Mustain on modified terms with respect to the remaining
amounts due to him.  In lieu of those remaining amounts due of $1.1 million, we
agreed to pay Mr. Mustain a total of approximately $0.3 million payable in five
annual installments commencing in 2004.  No gain will be recognized until the
Plan is liquidated.  Comdial also agreed to continue to pay Mr. Mustain the
aforementioned severance pay through the three-year severance period that
expires on December 31, 2003.

On September 28, 2001, Baisch & Skinner, Inc. ("Baisch") filed suit against
Comdial and a second defendant, Barron Communications, Inc. ("Barron") in St.
Louis County, Missouri, alleging multiple counts of breach of contract and
breach of warranty in connection with an agreement involving the installation by
Barron of a communications system at Baisch's place of business.  The suit seeks
$78,000 in compensatory damages and unspecified incidental and consequential
damages, interest and costs.  Comdial believes it has ample defenses to the
claims alleged in this matter.  The matter is currently in the discovery phase.

                                       18
<PAGE>

On October 2, 2001, ePHONE Telecom, Inc. filed for arbitration against Comdial
in Washington, DC, alleging fraud in the inducement, among other things, arising
from the alleged breach of an asset purchase and software license agreement.
ePHONE is seeking rescission of the agreement and a return of the full amount of
$2.7 million paid to us thereunder.  On March 20, 2002, ePHONE requested leave
to clarify its original claim by asserting $5.0 million in compensatory damages
and $5.0 million in punitive damages in addition to the damages described above.
No ruling has been made on that request.  Comdial will vigorously defend itself
against ePHONE's allegations and it has filed counterclaims against ePHONE for
an amount in excess of $2.0 million based on ePHONE's failure to make minimum
royalty payments due under the agreement and for loss of future revenues based
on ePHONE's breach of the agreement and the resulting termination thereof.
Comdial believes it has ample defenses to the claims alleged against Comdial in
this matter.

On November 2, 2001, Comdial reached a settlement of a lawsuit filed against the
Company by Rates Technology Inc. ("RTI") in the Eastern District of New York
alleging that certain of its products had infringed an expired patent held by
RTI.  According to the settlement agreement, Comdial agreed to pay an amount not
in excess of $0.5 million pursuant to a promissory note payable in quarterly
installments through August 2004 in exchange for dismissal of the suit against
Comdial and King Technologies, Inc. ("King").  King had been named as an
additional defendant in the suit under an amendment by RTI to its initial
complaint.  The specific financial terms of the settlement are confidential.  On
February 13, 2002, Comdial reached agreement with RTI on modified payment terms
under the aforementioned promissory note.  The note has been paid in full.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of 2001 to a vote of Comdial's
security holders.

                                       19
<PAGE>

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of March 18, 2002 there were 1,192 record holders of Comdial's Common Stock.

Quarterly Common Stock Information

The  following  table  sets  forth,  for the  periods  shown,  the  high and low
closing stock prices during the quarter in the  over-the-counter  market for
Comdial's Common  Stock,  as  reported by the  National  Association  of
Security  Dealers Automated  Quotation System ("Nasdaq").  Comdial's Common
Stock is traded on the Nasdaq SmallCap Market(R) under Comdial's symbol, CMDL.

<TABLE>
<CAPTION>


<S>                  <C>     <C>     <C>      <C>
                         2001            2000
Fiscal Quarters      High    Low     High     Low
First Quarter        $2.37   $1.06   $21.63   $9.00
Second Quarter        1.34    0.79    14.06    4.44
Third Quarter         1.02    0.61     5.38    2.03
Fourth Quarter        0.65    0.28     2.25    1.00
---------------------------------------------------
</TABLE>

Comdial has never paid a dividend on its Common Stock and its Board of Directors
currently  does not intend to change the policy of not paying cash  dividends on
Common Stock.

ITEM 6.  SELECTED FINANCIAL DATA

FIVE YEAR FINANCIAL DATA

Selected Consolidated Statements of Operations Data For the Years Ended December
31 In thousands, except per share amounts

<TABLE>
<CAPTION>
                                             2001       2000       1999       1998        1997
                                           --------------------------------------------------------
<S>                                        <C>        <C>       <C>         <C>        <C>
Net sales (a)                              $76,167    $89,564   $140,757    $123,639   $ 110,819
(Loss) income before income taxes          (21,799)   (47,864)    10,033       6,295       5,218
Net (loss) income                          (21,799)   (63,264)     7,343      17,032       5,069
(Loss) Earnings per share:
Basic                                        (2.37)     (6.89)      0.82        1.93        0.58
Diluted                                      (2.37)     (6.89)      0.82        1.88        0.58
---------------------------------------------------------------------------------------------------


Selected Consolidated Balance Sheet Data
December 31,
In thousands                                 2001       2000       1999       1998        1997
-----------------------------------------------------------------------------------------------

Current assets                              $22,440    $33,152    $72,077    $50,854    $37,107
Total assets                                 43,092     71,178    133,074    108,990     79,264
Current liabilities                          20,634     41,145     23,833     19,734     21,196
Long-term debt and other
 long-term liabilities                       32,742     18,518     38,633     26,624     13,998
Stockholders' (deficit) equity              (10,284)    11,515     70,608     62,632     44,070

</TABLE>

(a) During 2001,  the Company  classified  certain sales rebates and incentives
as a reduction of revenue. Previously, these incentives were classified as a
selling, general and administrative  expense.  The Company has also reclassified
such amounts for fiscal years 2000, 1999, 1998 and 1997 to conform to the 2001
presentation. These and other reclassifications had no effect on operating or
net income.

                                       20
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS

Critical Accounting Policies and Estimates

The consolidated financial statements of the Company are prepared in accordance
with accounting principles generally accepted in the United States, which
requires the use of estimates and assumptions (see Note 1 to the consolidated
financial statements). Management believes the following critical accounting
policies, among others, affect its more significant judgments and estimates used
in the preparation of its consolidated financial statements.

Revenue Recognition

We recognize revenue using the guidance from SEC Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" and the AICPA Statement of
Position No. 97-2, as amended, on "Software Revenue Recognition." Certain of our
sales have multiple elements, such as product and installation, and we allocate
the revenues using the relative fair values of the elements and recognize them
separately. We allow certain of our customers to return unsold product when they
meet Company-established criteria as outlined in the Company's trade terms.
Under these guidelines, we estimate the amount of product returns based upon
actual historical return rates and any additional unique information and reduce
our revenue by these estimated future returns. Returned products which are
recorded as inventories are valued based upon expected realizability. If the
historical data we use to calculate these estimates does not properly reflect
future returns, these estimates could be revised.

Rebates and Incentives

We record estimated reductions to revenue for customer programs and incentive
offerings including special pricing agreements, promotions and other volume-
based incentives. If market conditions were to decline, we may take actions to
increase rebates and incentive offerings possibly resulting in incremental
reduction of revenue at the time the incentive is offered.

Warranty

We provide a two-year warranty to our customers, and as of 2001 we are using a
third party to perform much of this warranty. Our outsource manufacturing
partners are now responsible for the first year of this warranty. We provide for
the estimated cost of product warranties at the time the revenue is recognized.
While we engage in various product quality programs and processes, our warranty
obligation may be affected by product failure rates, the ability of our
outsource manufacturers to satisfy warranty claims and the cost of warranty from
our third party. The outcome of these items could differ from our estimates and
revisions to the warranty estimates could be required.

Allowance for Doubtful Accounts

We provide allowances for doubtful accounts for estimated losses from the
inability of our customers to satisfy their accounts as originally contemplated
at the time of sale. We calculate these allowances based on detail review of
certain individual customer accounts, historical rates and our estimation of the
overall economic conditions affecting our customer base. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

                                       21
<PAGE>

Inventory

We measure our inventories at lower of cost or market. For those items which we
manufacture, cost is determined using standards which we believe approximate
first-in, first-out (FIFO) method including material, labor and overhead. We
also provide allowances for excess and obsolete inventory equal to the
difference between the cost of our inventory and the estimated market value
based upon assumptions about product life cycles, product demand and market
conditions. If actual product life cycles, product demand, or market conditions
are less favorable than those projected by management, additional inventory
allowances or writedowns maybe required.

Deferred Income Taxes

We estimate our actual current tax exposures together with our temporary
differences resulting from differing treatment of items for accounting and tax
purposes. These temporary differences result in deferred tax assets and
liabilities. We then must assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent that we believe
that recovery is not likely, based on the guidance in FAS 109, "Accounting for
Income Taxes," we establish a valuation allowance. As of December 31, 2001 and
2000, all net deferred tax assets were reduced by a valuation allowance. In
later years, after the Company ceases to have cumulative tax losses for three
years, management will need to assess the continuing need for a full or partial
valuation allowance. Significant judgment is required in this calculation and
changes in this assessment could result in income tax benefits, in later
periods, or the continued provision of valuation allowances until the
realizability is more likely than not.

Long-lived Assets, including Goodwill and Other Intangibles

We assess the impairment of our long-lived assets (such as Property and
Equipment, Goodwill and other Intangibles) whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Some
factors we consider important which could trigger an impairment review include
the following:

    . Significant underperformance relative to expected historical or projected
      future operating results

    . Significant changes in our strategic business plans, including changes in
      product mix

    . Significant negative information such as litigation or other claims or
      negative industry or economic trends

When we determine that the carrying value of these assets may not be recoverable
based on the above and other factors, we measure any impairment based on a
projected discounted cash flow method using a discount rate commensurate with
the risk inherent in our current business model. FAS 142 states that goodwill
will no longer be amortized, however the FAS also requires some changes in this
assessment which may result in impairments different from those resulting from
our present assessment.

                                       22
<PAGE>

Retirement and Other Postretirement Benefit Plans

Prior to the fourth quarter 2000, we provided a defined pension benefit and
other postretirement benefits to our employees. In the fourth quarter of 2000,
we froze these plans. We accrue benefit obligations based on an independent
actuarial valuation. This valuation has a number of variables, not only to
estimate our benefit obligation, but also to provide us with minimum funding
requirement for the retirement plan. The actuarial estimates include the
expected rate of return on the retirement plan assets, the rate of compensation
increases to eligible employees, the interest rate used to discount estimated
future payments to retirement participants and the assumed health care cost
trend rates. Differences in actual experience as compared to these estimates or
future changes in these estimates could require us to make changes to these
benefit accruals.

Commitments and Contingencies

Management's current assessment of it's the claims which have been asserted
against the Company is based on our review of the claim, our defenses and
consultation with certain of our external legal counsel. Changes in this
assessment could result as more information is obtained or as management decides
that a settlement is more advantageous to the Company than a protracted legal
process. These changes in our estimates of the outcome could require us to make
changes in our conclusions or our accruals for these contingencies.


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 ("Comdial"). This review should be read in
conjunction with the consolidated 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 2001 reporting basis (see Note 1 to the Consolidated Financial Statements).

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements included or incorporated by reference into our Securities
and Exchange Commission filings, press releases, and shareholder communications
and other information provided periodically in writing or orally by our
officers, directors or agents, including this Form 10-K, are forward-looking
statements that are subject to risks and uncertainties. These forward-looking
statements are not historical facts but rather are based on certain
expectations, estimates and projections about our industry, our beliefs and our
assumptions. These risks could cause our actual results for 2002 and beyond to
differ materially from those expressed, implied or forecasted in any forward-
looking statement made by, or on behalf of, us. The risks and uncertainties
include, but are not limited to, those discussed in "Safe Harbor Statement Under
the Private Securities Litigation Reform Act of 1995" set forth in Part I above.

                                       23
<PAGE>

SEGMENT REPORTING

RESULTS OF OPERATIONS

Selected  consolidated  statements of operations for the last three years are as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
In thousands                                         2001        2000        1999
---------------------------------------------------------------------------------
<S>                                              <C>         <C>         <C>
Business segment net sales:

Switching                                        $ 53,511    $ 49,545    $ 81,868
Messaging                                          15,183      28,014      38,907
CTI & Other                                         7,473      12,005      19,982
                                                 --------    --------    --------
       Net sales                                   76,167      89,564     140,757
Cost of goods sold                                 53,053      77,715      85,554
                                                 --------    --------    --------
Gross profit                                       23,114      11,849      55,203
Selling, general & administrative                  29,892      36,621      30,336
Engineering, research & development                 7,603       6,283       9,735
Goodwill amortization                               1,942       3,195       3,180
Restructuring                                         486       2,355           -
Impairment of long-lived assets                     3,224       7,425           -
Gain on disposal of assets                         (1,447)          -           -
Interest expense                                    2,759       2,902       1,633
Miscellaneous expense - net                           454         932         286
                                                 --------    --------    --------
(Loss) income before income taxes                 (21,799)    (47,864)     10,033
Income tax expense                                      -      15,400       2,690
                                                 --------    --------    --------
Net (loss) income                                $(21,799)   $(63,264)   $  7,343
                                                 ========    ========    ========

(Loss) earnings per share:
                    Basic                          $(2.37)     $(6.89)      $0.82
                                                 ========    ========    ========
---------------------------------------------------------------------------------

The following  table reflects the gross profit margins for the various  business
segments of Comdial.  See Note 12 to the Consolidated  Financial  Statements for
further clarification of business segments.
                                                    2001        2000        1999
                                                 --------    --------    --------
   Business Segment:
      Switching                                  $ 13,702    $  5,646    $ 29,148
      Messaging                                     8,967      13,248      21,943
      CTI & Other                                     445      (7,045)      4,112
                                                 --------    --------    --------
       Gross profit margin                       $ 23,114    $ 11,849    $ 55,203
                                                 ========    ========    ========
---------------------------------------------------------------------------------
</TABLE>

2001 COMPARED WITH 2000

Net sales as reported for 2001 decreased by 15% to $76.2 million, compared with
$89.6 million in 2000. The primary factors in the decrease of sales were the
market contraction, the product mix change and the decrease in the sales price.
Switching sales increased due to the introduction of new key systems that were
very competitively priced, but messaging declined sharply. Furthermore, CTI and
other decreased primarily due to the elimination of the Avalon product for the
assisted living market.

In 2001, net sales for switching increased 8% from $49.5 million in 2000 to
$53.5 million in 2001. Switching product sales were aided by the introduction of
a new low-end key system, the DX-80, and the higher-end system, the FX II.
Comdial also initiated certain promotional pricing for some of its products and
lowered the price of the phones across the board to improve the value to its
customers.

Messaging sales decreased 46%, from $28.0 million in 2000 to $15.2 million in
2001. The Company believes there are three major reasons why messaging revenues
declined from last year. The Company was compelled to lower prices due to
extreme competitive pressure on messaging prices across the product line to
compete in the marketplace. The Company also introduced a new low cost switching
platform, the DX-80. The in-skin voice mail in the DX-80 is priced less than
some of Comdial's other voice mail systems due to the lower overall costs of the
platform. Lastly, the Company has sold a significant portion of its messaging
products to customers who had non-Comdial switching platforms. Recently, other
switch platform manufacturers have released their own versions of voice mail and
this has reduced the opportunities for Comdial to sell its messaging systems on
the non-Comdial platforms.

                                       24
<PAGE>

CTI and Other sales decreased 38% from $12.0 million to $7.5  million. This
decrease is primarily attributable to Comdial's decision to exit the assisted
living market, previously served by its Avalon product.

Comdial provides reserves to cover product obsolescence for its products and
changes to those reserves impact gross profit. For the years 2001 and 2000,
provisions for obsolescence totaled $2.5 million and $3.7 million, respectively.
The reserve for obsolescence and valuation for 2000 was higher primarily due to
increased product discontinuance. Another factor which caused the inventory
obsolescence provision to be higher in 2000 was the decision to reduce the
number of phone models and key systems, which rendered some raw materials and
components obsolete. Future reserves will be dependent on management's estimates
of the recoverability of inventory costs and shifts in product demands.

Gross profit, as a percentage of sales for 2001, was 30% compared with 13% for
2000. In 2001, gross profit increased by 95% to $23.4 million compared with
$11.8 million for 2000. This increase was mostly due to outsourcing the
manufacturing operations as well as specific factors that negatively impacted
the year 2000. Outsourcing resulted in lower product costs due to the
consolidation of the product lines so that volumes were higher and therefore
production was done more efficiently and cost effectively. Also, the DX-80,
which is a low-end key system and has therefore more commodity like features, is
now outsourced from the Far East, which provides less expensive labor and
production costs. In addition, fiscal 2000 gross profit was impacted by several
negative factors: 1) reduced efficiency caused by the furloughs that Comdial
initiated throughout the year to reduce inventory levels within the plant as
well as the supply houses; 2) a larger provision for inventory obsolescence than
2001; 3) pursuant to its Restructuring Plan, Comdial charged $1.5 million to
cost of sales for discontinued product inventory in the fourth quarter of 2000;
and 4) due to the outsourcing of its manufacturing operations, Comdial recorded
an additional adjustment of $2.4 million to mark down certain of its inventory
to the lower of cost or market.

Switching gross margin increased from 11% in 2000 to 26% in 2001. This increase
was mostly due to outsourcing the manufacturing operations as well as the
absence of many of the specific factors that impacted the year 2000, as
explained above.

Messaging gross margin increased from 47% in 2000 to 59% in 2001. This increase
in gross margin was a result of product mix changes that resulted in increased
sales of our Windows based unified messaging products as well as cost reductions
due to downsizing and restructuring.

Gross margin for CTI and Other increased in 2001 to 6% compared to a negative
59% in 2000. During 2001 Comdial intentionally reduced the sales to the assisted
living market and reduced the number of people working on these projects and
therefore increasing the gross margin. During the latter half of 2001, Comdial
made a concerted effort to complete outstanding projects as it planned to exit
this business. This had a negative impact on the margin even though for the year
the gross margin exceeded 2000 significantly.

Other costs including operating expenses, goodwill amortization, interest
expense, other miscellaneous expenses, and income tax expenses or benefits are
not allocated to the three segments. Comdial does not maintain information that
would allow these costs to be broken into the various product segments and most
of the costs are shared in nature.

                                       25
<PAGE>

Selling, general and administrative expenses ("SG&A") decreased in 2001 by 18%
to $29.9 million compared with $36.6 million for 2000. SG&A expenses, as a
percentage of sales for 2001, decreased to 39% compared with 41% for 2000. This
decrease resulted from downsizing the work force and relocating the headquarters
from Charlottesville to Sarasota. The consolidation of administrative,
information technology, finance and sales and marketing functions created a more
efficient use of corporate infrastructure and eliminated redundant costs.

Engineering, research and development expenses increased in 2001 by 21% to $7.6
million compared with $6.3 million for 2000. Engineering expenses, as a
percentage of sales for 2001, increased to 10% compared with 7% for 2000. This
increase was primarily due to engineers spending more time on non-capitalizable
projects associated with new products that had been put into production.

Goodwill amortization expense in 2001 decreased by 39% to $1.9 million in 2001
compared with $3.2 million in 2000. The decrease was due to the write-down of
the Array goodwill that was recorded in 2001 as well as 2000. See discussion
below regarding Impairment of Long-Lived Assets.

Restructuring expense was $0.4 million for 2001. On September 28, 2001, as a
result of the downturn in the economy and the events of September 11, 2001,
management and the Board approved and executed a second restructuring plan.
Significant terms of the second plan included downsizing the workforce in both
the Sarasota and Charlottesville locations. Thirty employees in total were
terminated. During the month of October 2001, it became clear to management that
further restructuring was required and the Company implemented a further
contingency plan. During November 2001, it was announced that the Company would
eliminate more than 75 positions between November 2001 and April 2002. As of
December 31, 2001, the Company has a remaining obligation of $0.5 million
related to severance and related benefits which will be paid out in 2002.

Interest expense decreased in 2001 by 5% to $2.8 million compared with $2.9
million for 2000. This decrease was due to the pay-down of certain debt during
2001, offset by increases in interest rates.

Miscellaneous expense decreased by 51% for 2001 to $.5 million, compared with
$0.9 million for 2000. In 2000, the Company recognized a $0.4 million loss due
to the curtailment of its pension plans in September 2000.

Impairments of Long-Lived Assets - In accordance with SFAS No. 121, "Impairment
of Long-Lived Assets and Other Assets to Be Disposed of", the Company evaluates
long lived assets for impairment whenever events or changes in circumstance
indicate that the carrying amount of an asset may not be recoverable. In light
of the restructuring and the initiative to outsource manufacturing, the Company
identified certain of its fixed assets related to its manufacturing operations,
purchased software, capitalized software development costs, and the goodwill
related to its purchase of Array as assets that were impaired. This was based on
an analysis of discounted and undiscounted (as applicable) cash flows, which
were no longer deemed adequate to support the value of the assets associated
with the business. The impairments, included in Impairments of Long-Lived Assets
on the consolidated income statement are discussed below:

                                       26
<PAGE>

Property and Equipment Impairment - As a result of the outsourcing of the
manufacturing operations, the majority of the manufacturing assets are expected
to be sold or otherwise disposed of in 2002. The Company's projected
undiscounted cash flows related to those assets is less than the net book value
of the assets associated with the business. Such analysis resulted in impairment
loss of fixed assets in the amount of $1.0 million for 2001 and $0.3 million for
2000.

Capitalized Software Impairment - As part of Comdial's decision to outsource
manufacturing and reduce the number of product lines to a more appropriate
level, certain capitalized software development costs were impaired. Capitalized
software development costs relating to product lines that are to be discontinued
were considered impaired due to the Company's inability to realize any future
benefit from these assets. The impairment loss of capitalized software amounted
to $1.4 million in 2001 and $0.4 million in 2000.

Goodwill Impairment - Comdial sold the majority of the assets of Array Telecom
Corp. to ePHONE Telecom, Inc. and entered into a licensing agreement with ePHONE
on March 31, 2000. In light of the sale, Comdial performed an impairment
analysis on the projected cash flows of the remaining assets in 2000 and
determined that the goodwill associated with the Array assets was impaired. The
impairment of the goodwill was based on an analysis of projected undiscounted
cash flows, which were no longer deemed adequate to support the value of the
goodwill associated with the business. Comdial recorded an impairment write-off
of $2.8 million related to goodwill in 2000. In addition, in October 2001,
ePHONE filed for arbitration against the Company alleging fraud in the
inducement, among other things, and seeking return of the $2.7 million paid to
Comdial plus additional compensatory and punitive damages. The Company has filed
counterclaims against ePHONE, claiming that ePHONE has not paid us the minimum
royalties due under the license agreement, having paid just $0.09 million of
$0.2 million due for the period prior to May 2001 and none of the $0.1 million
in quarterly royalty payments due commencing in May 2001. Additionally, Comdial
is seeking $1.9 million in lost revenue based on the termination of the license
agreement brought about by ePHONE's breach. While the arbitration proceeding is
pending, Comdial concluded the remaining goodwill was impaired and recognized a
loss of $0.8 million in 2001. Comdial continues to defer certain gains totaling
$1.3 million at December 31, 2001 from the sale of the assets in 2000, pending
resolution of the arbitration.

Loss before income taxes, as a result of the foregoing, amounted to $21.8
million in 2001 as compared with a loss of $47.9 million before income taxes in
2000. Major factors contributing to the loss for 2001 include restructuring and
asset impairments, and other factors such as increased bad debt reserves and
inventory write-offs due to product discontinuance.

Income tax expense for 2001 was $0 in 2001 compared with $15.4 million for 2000.
The tax expense recognized in 2000 was primarily due to the provision for a full
valuation allowance of $34.1 million against the deferred tax assets (see Note 7
to the Consolidated Financial Statements). No income tax benefit has been
recognized in 2001 due to the cumulative losses for tax purposes, as prescribed
by SFAS No. 109, "Accounting for Income Taxes".


2000 COMPARED WITH 1999

Net sales as reported for 2000 decreased by 36% to $89.6 million, compared with
$140.8 million in 1999. The primary factors in the decrease of sales were the
reduction of inventory levels at the distributors and the market contraction.
Early in 2000, market conditions declined, and Comdial's sales were adversely
affected by the combined decision of Comdial and the distributors to reduce
their inventory levels. Comdial sought to respond to adverse sales conditions by
offering a more concise product line that is more responsive to customer needs.

                                       27
<PAGE>

In 2000, net sales for switching decreased 39% from $81.9 million to $49.5
million. The primary factors in this decrease were the decrease in inventory
levels at the distributors, and the market contraction as noted above.

Messaging sales decreased 28%, from $38.9 million in 1999 to $28.0 million in
2000. This decrease was predominantly tied to the decrease in switching sales,
as the messaging product is sold to the same supply houses and a significant
number of the same dealers as the switching product.

CTI and other sales decreased 40% from $20.0 million to $12.0 million. This
decrease is attributable to the poor growth in the assisted living market, as
well as the overall downturn in the economy.

Comdial provides reserves to cover product obsolescence for all its products and
changes to those reserves impact gross profit. For the years 2000 and 1999
provisions for obsolescence totaled $3.7 million and $0.5 million, respectively.
The reserve for obsolescence for 2000 was higher primarily due to increased
product discontinuance. Future reserves will be dependent on management's
estimates of the recoverability of inventory costs.

Also in 2000, Comdial established a warranty reserve in the amount of $0.8
million. Prior to 2000, Comdial reserved for expected returns through the use of
an exchange authorization reserve, and it is management's best estimate that
such exchange authorization reserve covered most of the costs that the Company
incurred with respect to warranty expenses. However, as the Company upgrades its
method of tracking such information, via improved systems, management recorded a
reserve specifically for warranty claims.

In 2000, international sales decreased by 38% to $1.6 million compared with $2.6
million for 1999. Due to homologation issues dealing with the sale of digital
products, Comdial has, for the time being, suspended its efforts in developing
further international markets for hardware products. 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 additional
engineering modifications and compliance testing. However, Comdial plans to
continue to expand its sales of voice mail products in the international market.

Gross profit, as a percentage of sales for 2000, was 13% compared with 39% for
1999. In 2000, gross profit decreased by 79% to $11.8 million compared with
$55.2 million for 1999. This decrease was attributable to several factors: 1)
reduced efficiency caused by the furloughs that Comdial initiated throughout the
year to reduce inventory levels within the plant as well as the distributors; 2)
the increase in the provision for inventory obsolescence; 3) pursuant to its
Restructuring Plan, Comdial charged $1.5 million to cost of sales for
discontinued product inventory in the fourth quarter of 2000; and 4) due to the
outsourcing of its manufacturing operations, Comdial recorded an additional
adjustment to cost of sales and reduced its ending inventory balances by $2.4
million to adjust inventory to the lower of cost or market.

Switching gross margin declined from 36% to 11%. This decrease is due primarily
to the furloughing during the year, the increased obsolescence reserves and
lower of cost or market adjustment of $2.4 million taken against inventory. In
addition, Comdial offered several pricing programs during the year to stimulate
sales.

Messaging gross margin decreased from 56% in 1999 to 47% in 2000. Relocation of
the manufacturing group to its new facility resulted in additional one-time
costs due to initial set-up.

                                       28
<PAGE>

The gross margin for CTI and Other decreased from 21% to a negative 59%. As more
of Comdial's competitors enter the market, Comdial has begun experiencing
significant market pressure on its pricing in certain of its vertical market
product lines, which adversely affected margins.

Furthermore, during 2000, Comdial began recording installation services expense
in cost of sales, rather than as a selling expense. Amounts in the 1999
consolidated financial statements have been reclassified to conform to the 2000
presentation. This resulted in net sales increasing $2.4 million for 1999. Cost
of goods sold was increased by $3.2 million for 1999. Selling, general and
administrative costs decreased by $0.8 million for 1999. These reclassifications
had no effect on previously reported consolidated net income.

Other costs including operating expenses, goodwill amortization, interest
expense, other miscellaneous expenses, and income tax expenses or benefits
cannot be allocated to the three segments. Comdial does not maintain information
that would allow these costs to be broken into the various product segments and
most of the costs are universal in nature.

Selling, general and administrative expenses ("SG&A") increased in 2000 by 21%
to $36.6 million compared with $30.3 million for 1999. SG&A expenses, as a
percentage of sales for 2000, increased to 41% compared with 22% for 1999. The
primary reasons for the increase were (1) increase in bad debt reserves of $2.5
million, based on the deterioration of the business climate in certain markets
in which Comdial sells; (2) increased personnel costs for national accounts for
the majority of the year; and (3) increased administration costs, including
costs for consultants, investment banking services and general legal fees.

Engineering, research and development expenses decreased in 2000 by 35% to $6.3
million compared with $9.7 million for 1999. Engineering expenses, as a
percentage of sales remained consistent at 7% for 2000 and 1999.

Goodwill amortization expense in 2000 remained consistent with that of 1999. The
Company reviewed goodwill for potential impairment as of December 31, 2000, and
determined that goodwill associated with the purchase of Array was impaired. See
discussion below regarding Impairment of Long-Lived Assets.

Interest expense increased in 2000 by 81% to $2.9 million compared with $1.6
million for 1999. This increase is twofold: 1) interest expenses increased due
to higher average debt levels with Bank of America, N.A. ("Bank of America"),
coupled with higher interest rates when compared to 1999 (see Note 6 to the
Consolidated Financial Statements), and 2) interest expense associated with
capital leases increased by approximately $.3 million in 2000 based on higher
balances of capital lease debt for all of 2000. Note that the capital leases
that were recorded as of December 31, 1999 had only been in place for one to
three months of 1999. Additional capital leases in the amount of $1.3 million
were entered into in early 2000.

Miscellaneous expense increased by 200% for 2000 to $.9 million, compared with
$0.3 million for 1999. This increase was primarily due to $1.0 million of write-
offs related to investments in dealers and notes receivable from dealers. In
addition, the Company recognized a $0.4 million loss due to the curtailment of
its pension plans in September 2000.

                                       29
<PAGE>

Restructuring - In the fourth quarter of 2000 the Board of Directors' approved
management's plan to restructure the Company (the "Plan"). Pursuant to the Plan,
152 employees were laid off effective December 15, 2000; another 222 employees
were notified prior to the end of 2000 that their positions would be eliminated
in fiscal 2001. As of December 31, 2000, Comdial accrued severance of $1.9
million and related benefits of $0.5 million, for a total restructuring cost of
$2.4 million related to the Plan.

Impairments of Long-Lived Assets - In accordance with SFAS No. 121, "Impairment
of Long-Lived Assets and Other Assets to Be Disposed of", the Company evaluates
long lived assets for impairment whenever events or changes in circumstance
indicate that the carrying amount of an asset may not be recoverable. In light
of the restructuring and the initiative to outsource manufacturing, the Company
identified certain of its fixed assets related to its manufacturing operations,
purchased software, capitalized software development costs, and the goodwill
related to its purchase of Array as assets that were impaired. This was based on
an analysis of discounted and undiscounted (as applicable) cash flows, which
were no longer deemed adequate to support the value of the assets associated
with the business. The impairments, included in Impairments of Long-Lived Assets
on the consolidated income statement are discussed below:

Purchased Software Impairment - In connection with the downsizing of Comdial's
entire operations, Comdial abandoned a systems implementation project that began
in 1999. As a result, Comdial wrote-off purchased software and other related
costs in the amount of $3.9 million in 2000. The Company financed the purchase
of the software through a series of five-year capital lease obligations, which
are a continuing obligation of the Company.

Property and Equipment Impairment - As a result of the outsourcing of the
manufacturing operations, the majority of the manufacturing assets are expected
to be sold or otherwise disposed of. The Company determined that the projected
undiscounted cash flows related to those assets were not adequate to support the
value of the assets associated with the business. Such analysis resulted in a
write-down of fixed assets in the amount of $0.3 million as of December 31,
2000.

Capitalized Software Impairment - As part of Comdial's decision to outsource
manufacturing and reduce the number of product lines, certain capitalized
software development costs were deemed to be impaired. Software development
costs previously capitalized relating to product lines that are to be
discontinued were written off due to the Company's inability to realize any
future benefit from these assets. The write-off of capitalized software amounted
to $.4 million.

Goodwill - The Company sold the majority of the assets of Array and entered into
a licensing agreement with ePHONE Telecom, Inc. in March 2000. In light of the
sale, the Company performed an impairment analysis on the projected cash flows
of the remaining assets and determined that the goodwill associated with its
purchase of Array, was, in fact, impaired. The impairment of the goodwill was
based on an analysis of projected undiscounted cash flows, which were no longer
deemed adequate to support the value of the goodwill associated with the
business. The Company recorded an impairment write-off of $2.8 million related
to goodwill.

Loss before income taxes, as a result of the foregoing, amounted to $47.9
million as compared with $10.0 million of income before income taxes in 1999.
Major factors contributing to the loss for 2000 include restructuring and asset
impairments, totaling $9.8 million, as described above. Other factors include
increased bad debt reserves, establishment of a warranty reserve specifically
for warranty claims, inventory write-offs due to product discontinuance, and
increased reserves for expected returns.

                                       30
<PAGE>

Income tax expense for 2000 amounted to $15.4 million, compared with $2.7
million for 1999. The tax expense recognized in 2000 was primarily due to the
provision for a full valuation allowance of $34.1 million against the deferred
tax assets. The tax expense recognized in 1999 was reduced primarily due to the
utilization of deferred tax benefits of $2.1 million that were generated from
net operating losses ("NOLs") in previous years (see Note 7 to the Consolidated
Financial Statements).

LIQUIDITY AND CAPITAL RESOURCES

The following  table sets forth  Comdial's  cash and cash  equivalents,  current
maturities on debt, and working capital at the dates indicated:

--------------------------------------------------------
December 31,
In thousands                             2001      2000
--------------------------------------------------------
    Cash and cash equivalents          $1,239   $ 2,428
    Current maturities of debt          2,596    24,848
    Working capital (deficiency)        1,806    (7,993)
--------------------------------------------------------

The Company believes its current cash levels and cash flows from operations will
be adequate to fund operations and meet its debt service requirements for at
least the next twelve months. However, to the extent that additional funds are
required in the future to address working capital needs and to provide funding
for capital expenditures, expansion of the business or additional acquisitions,
the Company will need to seek additional financing. There can be no assurance
that additional funding will be available when required or on acceptable terms.
If such additional financing is not available to the Company when required, it
could have a material adverse effect on the Company's financial condition and
results of operations.

Through November 22, 2000, all operating cash needs were funded through a $50
million revolving credit facility provided by Bank of America. As of November
22, 2000, Comdial and Bank of America, N.A. entered into an Amended and Restated
Credit Agreement restructuring the terms of the Credit Agreement with the Bank
dated October 22, 1998. This agreement is now funding all operational
requirements as needed. Comdial reports the credit facility activity on a net
basis on the Consolidated Statements of Cash Flows. Comdial considers
outstanding checks to be a bank overdraft. As of December 31, 2001, Comdial's
cash and cash equivalents were lower than December 31, 2000 by $1.2 million, due
primarily to the timing of deposits and payments made at year-end.

Accounts Receivable at December 31, 2001, decreased by $2.9 million compared
with December 31, 2000, primarily due to the decreased level of sales during the
year, as well as improved collections. Comdial also increased its bad debt
reserves by $2.2 million in the fourth quarter of 2001 due to declining economic
conditions affecting primarily dealers and vertical market customers for the
Company's Avalon and Concierge products.

Inventory at December 31, 2001, decreased by $5.9 million compared with December
31, 2000, due, in part, to additional reserves for discontinued product lines
and obsolescence of $2.5 million. In addition, as a result of the Company's
decision to outsource the majority of its manufacturing operation, and its plan
to restructure, the Company reduced its overall inventory levels at December 31,
2001.

Other assets decreased by $2.3 million primarily due to current year
amortization of capitalized assets and the write-off of $1.4 million of
capitalized software development and contract research and development.

                                       31
<PAGE>

Capital additions, excluding additions to capitalized software, for 2001 were
approximately $0.2 million. Capital additions were funded by cash generated from
operations and borrowings from the revolver. Cash expenditures for capital
additions for 2001, 2000, and 1999 amounted to $0.2 million, $2.6 million, and
$3.9 million, respectively. Management anticipates that approximately $0.1
million will be spent on capital additions and $1.0 million will be spent on
software development activities during 2002. The significant decrease in capital
additions in the future is the result of outsourcing manufacturing, reducing the
need for capital equipment. In addition, Comdial has substantially reduced
headcount, therefore reducing the amount of information technology expenditures
that were previously incurred by the Company.

Accounts payable at December 31, 2001, increased by $3.7 million when compared
to December 31, 2000. This increase was primarily due to timing of payment to
vendors.

Working capital increased to $1.8 million at December 31, 2001 compared with a
working capital deficiency of $8.0 million at December 31, 2000. This increase
is primarily due to the reclassification of $22.4 million of bank debt from
current to long-term. See Note 6.

LONG-TERM DEBT, INCLUDING CURRENT MATURITIES

In 1998, Comdial and Bank of America, N.A. ("Bank of America") formerly
NationsBank, N.A., entered into a credit agreement providing Comdial with a
revolving credit facility and a letter of credit subfacility.

On November 22, 2000 and again on April 10, 2001, the credit agreement was
amended.

On March 6, 2002, Comdial and Bank of America entered into the First Amendment
to the Amended and Restated Credit Agreement (the "First Amendment") which
reduced the Revolver commitment to $8 million, reduced the Term Loan to
approximately $4.9 million and agreed to extend the $1.5 million in letters of
credit until March 31, 2003. Both the Revolver and the Term Loan mature March
31, 2002.

The First Amendment changed the schedule of principal payments on the Term Loan
balance. The term note will start amortizing in September 2002 using a 36-month
amortization schedule. The First Amendment also changed the applicable interest
rate to an interest rate based on the Prime Rate plus a specified margin.
Effective as of March 6, 2002, the interest rate is equal to the Prime Rate plus
four percent. As of March 6, 2002, Comdial had no additional availability under
the Revolver or the Term Loan.

Comdial's indebtedness to Bank of America under the Credit Agreement, as amended
by the First Amendment is secured by liens on all of Comdial's properties and
assets. The First Amendment modified the financial covenants relating to
consolidated net income and contained other covenants related to consolidated
net worth and cross default provisions. The First Amendment also provided for
the waiver of all 2001 violations and defaults.

In addition to the terms discussed above, in connection with the First
Amendment, $10 million of outstanding debt of Comdial to Bank of America was
converted into Series B Alternate Rate Cumulative Convertible Redeemable
Preferred Stock, par value $10 per share (the "Preferred Stock"). Comdial issued
1,000,000 shares of the Preferred Stock to Bank of America. The Preferred Stock
can be converted at any time into a maximum of 1.5 million shares of Comdial
common stock. This conversion ratio will be reduced to as low as 500,000 shares
of common stock in the event Comdial elects to pay down the Term Loan by up to
$3 million, in connection with new investment into the Company by an outside
investor. Comdial has a call option allowing it to buy out Bank of America's
Preferred Stock at par value, but Bank of America has no mandatory redemption.
The Preferred Stock has a 5 percent cumulative annual dividend if paid with cash
or 10 percent if paid in common stock, at the election of Comdial. The shares of
common stock issuable to Bank of America upon conversion of the Preferred Stock
and as payment of dividends are subject to certain demand and piggyback
registration rights pursuant to a registration rights agreement which will
require the Company to register such shares of common stock for resale in the
public market upon request.
                                       32
<PAGE>

OTHER FINANCIAL INFORMATION

During fiscal years 2001, 2000 and 1999, primarily all of Comdial's sales, net
income, and identifiable net assets were attributable to the telecommunications
industry.


CURRENT PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statement No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. SFAS No. 142 is required to be applied in fiscal years beginning after
December 15, 2001. The Company expects to realize an annual increase in pre-tax
income of $1.5 million due to the cessation of amortization on the goodwill.

In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
Accounting for Asset Retirement Costs ("SFAS No. 143"). This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement is required to be applied in fiscal years beginning after
June 15, 2002. The adoption of this Statement is not expected to have a material
impact on the Company's operations.

In August 2001, the Financial Accounting Standards Board issued Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144"). Statement 144 provides guidance on differentiating between assets held
and used and assets to be disposed of. This Statement is required to be applied
in fiscal years beginning after December 15, 2001. The adoption of this
Statement is not expected to have a material impact on the Company's operations.

During 2001, the Emerging Issues Task Force reached a consensus on Issue 00-25,
Consideration from a Vendor to a Reseller. This consensus creates a presumption
that all consideration paid by a vendor to a reseller should be classified as a
reduction of revenue in the vendor's income statement (instead of an expense)
unless certain criteria are met. Accordingly, the Company has classified certain
sales rebates and incentives as a reduction of revenue.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Comdial believes that it does not have any material exposure to market risk
associated with activities in derivative financial instruments, other financial
instruments and derivative commodity instruments. The Company has debt
obligations that are sensitive to changes in the prime lending rate. The Company
estimates that an increase in interest rates of 1% would reduce income before
taxes by approximately $230,000 per year.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                       33
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Stockholders and Board of Directors of Comdial Corporation:

We have audited the accompanying consolidated balance sheet of Comdial
Corporation ("the Company") as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year then ended. Our audit also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Comdial
Corporation at December 31, 2001, and the consolidated results of their
operations and their cash flows the year then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

                                                       /s/ ERNST & YOUNG LLP
Tampa, Florida
March 28, 2002

                                       34
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Comdial Corporation
Charlottesville, Virginia

We have audited the accompanying consolidated balance sheets of Comdial
Corporation and subsidiaries ("Comdial") as of December 31, 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a)2. These financial statements and financial statement schedule are the
responsibility of Comdial's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance 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 as of December 31, 2000, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.


/s/ DELOITTE & TOUCHE LLP
Richmond, Virginia
April 10, 2001


                                       35
<PAGE>

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
Consolidated Balance Sheets
---------------------------------------------------------------------------------------------
                                                                              December 31,
                                                                           2001         2000
In thousands, except par value
---------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>
Assets
     Current assets
        Cash and cash equivalents                                     $   1,239    $   2,428
        Accounts receivable (less allowance for
            doubtful accounts:  2001 - $3,533; 2000 - $2,834)            10,915       13,829
        Inventories                                                       9,527       15,431
        Prepaid expenses and other current assets                           759        1,464
---------------------------------------------------------------------------------------------
            Total current assets                                         22,440       33,152
---------------------------------------------------------------------------------------------
     Property and equipment - net                                         5,839       18,753
     Goodwill                                                             3,375        6,149
     Capitalized software development costs - net                         7,790        9,448
     Other assets                                                         3,648        3,676
---------------------------------------------------------------------------------------------
            Total assets                                              $  43,092    $  71,178
=============================================================================================

Liabilities and Stockholders' Equity (Deficit)
     Current liabilities
        Accounts payable                                              $  11,266    $   7,522
        Accrued payroll and related expenses                              1,778        4,391
        Accrued promotional allowances                                    2,336        1,324
        Other accrued liabilities                                         2,658        3,060
        Current maturities of debt                                        2,596       24,848
---------------------------------------------------------------------------------------------
            Total current liabilities                                    20,634       41,145
---------------------------------------------------------------------------------------------
     Long-term debt                                                      26,912       13,561
     Other long-term liabilities                                          5,830        4,957
---------------------------------------------------------------------------------------------
            Total liabilities                                            53,376       59,663

     Stockholders' equity (deficit)
        Common stock, $0.01 par value
             (Authorized 30,000 shares; issued and
             outstanding: 2001 - 9,337; 2000 - 9,329)                        93           93
        Paid-in capital                                                 123,427      123,427
        Treasury stock, 132 shares, at cost                              (1,296)      (1,296)
        Accumulated deficit                                            (132,508)    (110,709)
---------------------------------------------------------------------------------------------
            Total stockholders' equity (deficit)                        (10,284)      11,515
---------------------------------------------------------------------------------------------
            Total liabilities and stockholders' equity (deficit)      $  43,092    $  71,178
=============================================================================================
       The accompanying notes are an integral part of these financial statements.

</TABLE>

                                       36
<PAGE>

--------------------------------------------------------------------------------
Consolidated Statements of Operations
--------------------------------------------------------------------------------
                                                     Years Ended December 31,
                                                   2001         2000        1999
In thousands, except per share amounts
--------------------------------------------------------------------------------
Net Sales                                     $  76,167    $  89,564    $140,757
Cost of goods sold                               53,053       77,715      85,554
--------------------------------------------------------------------------------
Gross profit                                     23,114       11,849      55,203
--------------------------------------------------------------------------------

Operating expenses
     Selling, general & administrative           29,892       36,621      30,336
     Engineering, research & development          7,603        6,283       9,735
     Goodwill amortization                        1,942        3,195       3,180
     Restructuring                                  486        2,355           -
     Impairments of long-lived assets             3,224        7,425           -
--------------------------------------------------------------------------------
        Operating (loss) income                 (20,033)     (44,030)     11,952
--------------------------------------------------------------------------------

Other expense
     Interest expense                             2,759        2,902       1,633
     Gain on disposal of assets                  (1,447)           -           -
     Miscellaneous expense - net                    454          932         286
--------------------------------------------------------------------------------
(Loss) income before income taxes               (21,799)     (47,864)     10,033
Income tax expense                                    -       15,400       2,690
--------------------------------------------------------------------------------
        Net (loss) income                      ($21,799)    ($63,264)   $  7,343
================================================================================

(Loss) earnings per share:
  Basic                                          $(2.37)     $ (6.89)   $   0.82
================================================================================
  Diluted                                        $(2.37)     $ (6.89)   $   0.82
================================================================================

Weighted average common shares outstanding:
  Basic                                           9,211        9,188       8,948
  Diluted                                         9,211        9,188       8,989

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



                                       37
<PAGE>

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity (Deficit)
--------------------------------------------------------------------------------------------------------------
                                                                                Deferred Stock
                                                        Common Stock              Incentive
                                                        ------------          -------------------      Paid-in
In thousands                                          Shares    Amount          Shares    Amount       Capital
--------------------------------------------------------------------------------------------------------------
<S>                                                   <C>         <C>             <C>      <C>        <C>
Balance at January 1, 1999                             8,966      $89             8         $ 84      $118,489
 Proceeds from sale of common stock
  Notes receivable
  Stock options exercised                                 10                                                20
 Deferred stock compensation                                                      6           47
 Incentive stock issued                                    8        1                                       53
 Stock option compensation                                                                                  41
 Contingency stock issued for
  KVT acquisition                                         72        1                                      303
  Array acquisition                                                                                        162
 Net income
--------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999                           9,056       91            14          131       119,068
 Proceeds from sale of common stock
  Notes receivable
  Stock options exercised                                262        2                                    2,136
 Treasury stock purchased
 Deferred stock compensation                                                      4           78
 Incentive stock issued                                   11                                               169
 Stock option compensation expense                                                                       1,845
 Net loss
--------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000                           9,329       93            18          209       123,218
 Stock options exercised                                   8                                                 8
 Deferred stock compensation                                                     (8)          (8)
 Net loss
--------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001                           9,337      $93            10         $201      $123,226
==============================================================================================================
</TABLE>


<TABLE>
<CAPTION>


                                                        Treasury Stock       Receivable
                                                      -----------------      on Sale      Accumulated
In thousands                                          Shares     Amount      of Stock       Deficit      Total
---------------------------------------------------------------------------------------------------------------
<S>                                                    <C>      <C>          <C>          <C>         <C>
 Balance at January 1, 1999                             (116)   $(1,087)      $(156)      $ (54,788)  $ 62,631
      Proceeds from sale of common stock
      Notes receivable                                                            6                          6
      Stock options exercised                                                                               20
      Deferred stock compensation                                                                           47
      Incentive stock issued                                                                                54
      Stock option compensation)                                                                            41
      Contingency stock issued for                                                                           -
         KVT acquisition                                                                                   304
         Array acquisition                                                                                 162
      Net income                                                                              7,343      7,343
---------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1999                           (116)    (1,087)       (150)        (47,445)    70,608
      Proceeds from sale of common stock
         Notes receivable                                 (9)      (149)        150                          1
         Stock options exercised                                     (6)                                 2,132
      Treasury stock purchased                            (7)       (54)                                   (54)
      Deferred stock compensation                                                                           78
      Incentive stock issued                                                                               169
      Stock option compensation expense                                                                  1,845
      Net loss                                                                              (63,264)   (63,264)
---------------------------------------------------------------------------------------------------------------
 Balance at December 31, 2000                           (132)    (1,296)          -        (110,709)    11,515
      Stock options exercised                                                                                8
      Deferred stock compensation                                                                           (8)
      Net loss                                                                              (21,799)   (21,799)
---------------------------------------------------------------------------------------------------------------
 Balance at December 31, 2001                           (132)   $(1,296)      $-          $(132,508)  $(10,284)
===============================================================================================================

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

</TABLE>

                                       38
<PAGE>

<TABLE>
<CAPTION>

Consolidated Statements of Cash Flows
------------------------------------------------------------------------------------------------------------
                                                                                 Years Ended December 31,
In thousands                                                                   2001        2000        1999
------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>        <C>          <C>
Cash flows from operating activities:
    Net (loss) income                                                      $(21,799)   $(63,264)   $  7,343
    Adjustments to reconcile net (loss) income to
     operating cash flows
     Depreciation and amortization                                            8,353      11,236       9,642
     Impairments of long-lived assets                                         3,224       7,425           -
     Bad debt expense                                                         2,288       2,793         194
     Inventory obsolescence and valuation provision                           2,475       2,116         487
     Deferred taxes                                                               -      15,456       2,147
     Gain on sale of assets                                                  (1,447)          -           -
    Changes in working capital components:
     Accounts receivable                                                        626      23,078     (16,888)
     Inventory                                                                5,529       5,280      (1,880)
     Prepaid expenses and other assets                                          420       2,502      (5,560)
     Accounts payable                                                         5,384      (7,613)      4,101
     Other liabilities                                                       (3,392)        443       2,387
     Other equity                                                                 -       2,035         619
------------------------------------------------------------------------------------------------------------
       Net cash provided by (used by) operating activities                    1,661       1,487       2,592
------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
    Acquisition cost for Array                                                    -           -          (5)
    Proceeds received from sale of ePHONE assets                                  -         648           -
    Proceeds received from sale of American Phone
       Center assets                                                          1,400           -           -
    Proceeds received from sale of property and equipment                    11,453         891           1
    Capital expenditures                                                       (294)     (5,130)     (4,953)
    Capitalized software additions                                           (2,768)     (4,400)     (4,700)
------------------------------------------------------------------------------------------------------------
       Net cash provided by (used by) investing activities                    9,791      (7,991)     (9,657)
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
    Net (repayments) borrowings under revolver agreement                    (12,221)      5,528       7,464
    Proceeds from issuance of common stock                                        -       2,136          20
    Principal payments on notes payable                                        (389)          -           -
    Principal payments under capital lease obligations                          (31)       (649)       (101)
------------------------------------------------------------------------------------------------------------
       Net cash (used by) provided by financing activities                  (12,641)      7,015       7,383
------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                         (1,189)        511         318
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year                                2,428       1,917       1,599
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                   $  1,239    $  2,428    $  1,917
============================================================================================================

------------------------------------------------------------------------------------------------------------
Supplemental information - Cash paid during the year for:
    Income taxes                                                           $      -    $    508    $    503
    Interest                                                                  2,719       2,902       1,633
------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities:
    Accounts payable converted to notes payable                            $  1,640    $      -    $      -
    Assets acquired through capital lease transactions                            -       1,264       2,800
    Contingency stock issued for acquisitions                                     -           -         466
------------------------------------------------------------------------------------------------------------
</TABLE>


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

                                       39
<PAGE>

Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

NATURE OF OPERATIONS

Comdial is a United States ("U.S.") based developer and distributor of business
communication systems. Comdial's principal customers are small to mid-sized
offices throughout the U.S. and certain international markets. The distribution
network consists of major distributors and direct sales to dealers, national
account customers and government entities. Beginning in fiscal 2001, the Company
has outsourced the majority of its manufacturing operations to three suppliers.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
certain estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and the disclosure of contingent assets and
liabilities at the date of the financial statements and for the reporting
periods. The most significant estimates relate to the allowance for doubtful
accounts, inventory obsolescence, warranty reserves, allowance for product
returns, intangible asset valuations and lives, employee benefit plans, and the
valuation of deferred tax assets. These estimates may be adjusted as more
current information becomes available, and any adjustment could be significant.

CASH AND CASH EQUIVALENTS

Cash equivalents are defined as short-term liquid investments with maturities,
at the time of purchase, of less than 90 days that are readily convertible into
cash. Under Comdial's current cash management policy, borrowings from the
revolving credit facility are used for general operating purposes. The revolving
credit facility is reduced by cash receipts that are not needed for daily
operations. Bank overdrafts of $2.1 million are included in accounts payable at
December 31, 2000. Bank overdrafts are outstanding checks that have not (1)
cleared the bank or (2) been funded by the revolving credit facility. The
revolving credit facility activity is reported on a net basis in the
Consolidated Statements of Cash Flows.

INVENTORIES

Inventories are stated at the lower of cost (standard in the case of
manufactured goods or purchased cost for finished goods purchased from outsource
manufacturers) or market. Cost approximates first-in, first-out method.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost less impairment losses, if
applicable. 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 or lease term, if shorter.
Expenditures for maintenance and repairs of property and equipment are charged
to expense. Improvements and repairs, which extend economic lives, are
capitalized.

In 2000, Comdial expensed certain computer hardware and software due to the
rapid change in technology that has affected a need for continual replacements.
In 2000, some of the major expenditures for computer hardware and software were
financed through operating and capital leases.

                                       40
<PAGE>

The estimated useful lives of the Company's property and equipment are as
follows:

Buildings                                              30 years
Land Improvements                                      15 years
Machinery and Equipment                                 7 years
Computer Hardware Equipment and Tooling                 5 years
Leasehold Improvements                                  5 years
Computer Software for Internal Use                      3 years

INTANGIBLES

The cost in excess of the fair value of net assets of businesses acquired
(goodwill) is amortized over periods ranging from 2 to 10 years. At December 31,
2001 and 2000, the Company had goodwill of $3.4 million and $6.1 million, net of
accumulated amortization of $14.0 million and $16.7 million, respectively. The
Company recognized amortization expense of $1.9 million, $3.2 million and $3.2
million in 2001, 2000 and 1999, respectively.

The Company evaluates periodically the propriety of the carrying amount of
intangible assets, including goodwill, as well as the amortization period to
determine whether current events or circumstances warrant adjustments to the
carrying value and/or revised estimates of useful lives. This evaluation
consists of the projection of undiscounted operating cash flows before
depreciation, amortization, nonrecurring changes and interest over the remaining
amortization periods of the related intangible assets. If such projections
indicate that undiscounted operating cash flows, as adjusted, is not expected to
be adequate to recover the carrying amounts of the related intangible assets, a
loss is recognized to the extent that the carrying value of the asset exceeds
its fair value. At this time, the Company believes that no impairment of
goodwill or other intangible assets has occurred, other than as recorded and
disclosed in Note 16, and that no reduction of the estimated useful lives is
warranted.
LONG-LIVED ASSETS

Long-lived assets are reviewed for impairment as circumstances change that might
affect those assets. Impairment loss is not recognized unless a portion of the
carrying amount of an asset is no longer recoverable based on a review of the
asset's expected future undiscounted cash flows.

During 2001 and 2000, as a result of the Company's restructuring and the
initiative to outsource manufacturing, the Company identified certain long-lived
assets that were impaired. In addition, a portion of the Company's goodwill was
deemed impaired. See Note 16.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

In 2001, 2000 and 1999, Comdial incurred costs associated with the development
of software related to Comdial's various products, including development
performed by outside contract engineers. The accounting for such software costs
is in accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed". Costs capitalized in accordance with SFAS No. 86 are
amortized using the straight-line method over their useful lives, which are
estimated by the Company to be three years. This three year straight-line method
causes greater expense for each period versus using the revenue method. The
total amount of unamortized software development costs is $7.8 million and $9.4
million, respectively, at December 31, 2001 and 2000. Accumulated amortization
of software development costs is $8.6 million and $6.7 million, respectively, at
December 31, 2001 and 2000. Total software development costs of $2.8 million,
$4.4 million and $4.7 million were capitalized in the years ended December 31,
2001, 2000 and 1999, respectively. Amortization of capitalized software
development costs of $3.1 million, $3.3 million and $2.4 million was recorded in
the years ended December 31, 2001, 2000 and 1999, respectively.

                                       41
<PAGE>

As a result of the discontinuance of certain of its product lines in 2001 and
2000, the Company recognized an impairment loss on the associated capitalized
software development costs. See Note 16.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs for the fiscal years ended 2001, 2000 and 1999,
comprise the majority of engineering, research, and development costs, which
were $7.6 million, $6.3 million and $9.7 million, respectively. Comdial is
unable to segregate and quantify the amount of research and development costs
from other engineering costs for such fiscal years.

POSTRETIREMENT BENEFITS OTHER THAN PENSION

Comdial accrues estimated costs relating to postretirement health care and life
insurance benefits. In 2001, Comdial recognized no income or expense compared to
income of $12,000 during 2000 and expense of $137,000 during 1999. See Note 10.

REVENUE RECOGNITION

The Company recognizes revenue using the guidance from Staff Accounting Bulletin
No. 101 (SAB 101), "Revenue Recognition in Financial Statements" and AICPA
Statement of Position 97-2, "Software Revenue Recognition." Accordingly, revenue
is recognized when all of the following four criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery of the products and/or services
has occurred; (3) the selling price is both fixed and determinable and (4)
collectibility is reasonably assured. Certain of Comdial's sales have multiple
elements, such as product and installation, and the Company allocates the
revenues from these contracts to the elements and recognizes them separately.
Generally, the Company recognizes revenues based on their respective fair values
on product sales at the time of shipment. The Company accrues a provision for
estimated returns concurrent with revenue recognition and classifies certain
sales rebates and incentives to its dealers and distributors as a reduction of
revenue. Comdial recognizes service revenue upon completion of the repairs or
installation.

The Company recognizes shipping and handling fees as revenue, and the related
expenses as a component of cost of sales. All internal handling charges are
charged to selling, general and administrative expenses.

ADVERTISING COSTS

Costs related to advertising are generally expensed as incurred. Advertising
expense was $0.4 million, $1.0 million and $1.4 million in 2001, 2000 and 1999,
respectively.

ACCOUNTING FOR STOCK-BASED COMPENSATION

Comdial accounts for stock-based compensation using the intrinsic value method
under Accounting Principles Board ("APB") Opinion No. 25. Comdial has disclosed
in Note 11 to the consolidated financial statements pro forma net income and
earnings per share, as if Comdial had applied the fair value method for stock
options and similar equity instruments, in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation".

Until March 2001, the 1992 Stock Incentive Plan (the "Stock Plan") had features
that permitted option recipients to tender shares as partial or full
consideration of the exercise price, which caused the Stock Plan to be
classified as a variable plan. Under variable plan accounting, compensation
expense is measured, as of each reporting date, as the amount by which the
quoted market price of the shares of the Company's stock covered by the option
grant exceeds the exercise price; compensation expense is recognized over the
option's vesting period. Changes, either increases or decreases, in the quoted
market price of the Company's shares between the date of grant and the date of
exercise result in a change in the measure of compensation expense. After the
March 2001 amendment, the Stock Plan became a fixed plan.

                                       42
<PAGE>

The other option plans are accounted for as fixed plans. Accordingly, no
compensation cost has been recognized for the Company's fixed stock option plans
other than the performance based options that are part of the plan for the
Company's directors.

The Company recognized compensation expense in the amount of $0, $847,000 and
$511,000 for its variable stock option plan for the years ended December 31,
2001, 2000 and 1999, respectively. The compensation expense recognized for its
director's performance-based stock options was $0, $130,000, and $85,000 for
2001, 2000 and 1999, respectively.

Income Taxes

Comdial uses the liability method of accounting for income taxes, which is based
on the differences between the financial statement and tax basis of assets and
liabilities multiplied by the enacted tax rates that are known to be in effect
when the differences reverse. 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. Comdial has incurred cumulative
operating losses through 2001 for financial statement and tax reporting purposes
and has adjusted its valuation allowance account to equal the net deferred tax
asset (see Note 7). Tax credits, if any, will be utilized to reduce current and
future income tax expense and payments.

EARNINGS (LOSS) PER COMMON SHARE

Basic EPS is computed by dividing net income (loss) by the weighted average
number of common shares outstanding. Diluted EPS is computed by dividing income
by the weighted average number of common and potentially dilutive common shares
outstanding during the period. See Note 8.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. The Company has evaluated the fair
value of its debt at December 31, 2001 and estimated it to be between $20
million and $22 million, due to the restructuring of its long-term debt. See
Note 6.

RECLASSIFICATIONS

The Company has reclassified certain amounts for 2000 and 1999 to conform to the
2001 presentation. These and other reclassifications had no effect on operating
or net income.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statement No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. SFAS No. 142 is required to be applied in fiscal years beginning after
December 15, 2001. The Company expects to realize an annual increase in pre-tax
income of $1.5 million due to the cessation of amortization on the goodwill. The
adoption of this Statement is not expected to have a material impact on the
Company's operations.

In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
Accounting for Asset Retirement Costs ("SFAS No. 143"). This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement is required to be applied in fiscal years beginning after
June 15, 2002. The adoption of this Statement is not expected to have a material
impact on the Company's operations.

                                       43
<PAGE>

In August 2001, the Financial Accounting Standards Board issued Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144"). Statement 144 provides guidance on differentiating between assets held
and used and assets to be disposed of. This Statement is required to be applied
in fiscal years beginning after December 15, 2001. The adoption of this
Statement is not expected to have a material impact on the Company's operations.

During 2001, the Emerging Issues Task Force reached a consensus on Issue 00-25,
Consideration from a Vendor to a Reseller. This consensus creates a presumption
that all consideration paid by a vendor to a reseller should be classified as a
reduction of revenue in the vendor's income statement (instead of an expense)
unless certain criteria are met. Accordingly, the Company has classified certain
sales rebates and incentives as a reduction of revenue.

NOTE 2. ACQUISITIONS & DISPOSALS

SALE OF AVALON BUSINESS

In October 2001, Comdial entered into an agreement to sell its Avalon product
line and certain related assets to a third party for approximately $125,000.
Significant terms of the contract include conditional exclusivity of the rights
and technology associated with the Avalon product, license fees to be paid to
Comdial over a three-year period, and assignment of in-process customer
contracts. Due to losses on assignments of in-process customer contracts, the
Company recognized a loss of $81,000 in 2001 related to the sale, which is
recognized in gain on sale of assets in the accompanying statements of
operations.

SALE OF AMERICAN PHONE CENTERS, INC.

In May 2001, the Company sold certain assets of its subsidiary, American Phone
Centers ("APC"), for $1.4 million, all of which was collected in 2001. Included
in the sale were the following assets: inventory, equipment, excess and
discontinued products and certain intellectual property rights associated with
APC. A sales and marketing executive of Comdial owns approximately 5% of the
buyer. In addition, 53 of the Company's employees became employees of the buyer.
The Company and the buyer entered into two ancillary agreements related to
repair of products and the sale of discontinued products. The Repair Agreement
authorizes the buyer to perform certain non-warranty repair work on Comdial
products. Under the Discontinued Product Agreement, the buyer is authorized to
sell certain discontinued Comdial products. The Company recognized a loss of
$45,000 on the sale during 2001, which is recognized in gain on sale of assets
in the accompanying statements of operations.

SALE/LEASEBACK OF MANUFACTURING FACILITY

In March 2001, the Company sold its Charlottesville, Virginia, headquarters and
manufacturing facility. The purchase price for the property was $11.4 million,
all of which was collected in 2001. The Company is leasing back a portion of the
facility through August 30, 2003, for low volume board production, light
assembly, engineering, and technical services functions. Over the 30 month
period, lease payment obligations total $2.6 million.

The total gain on the sale of the facility amounted to $5.1 million. The Company
immediately recognized a gain of $2.9 million in 2001 which is the amount by
which the gain exceeds the present value of the minimum lease payments to be
made by the Company from the closing date through August 30, 2003. The remaining
amount of the gain of $2.2 million has been deferred due to the leaseback and is
being amortized over three years, the term of the lease, as a reduction of rent
expense. During 2001, the Company amortized $1.1 million as a reduction of rent
expense. As of December 31, 2001, the balance of the deferred gain amounts to
$1.1 million.

                                       44
<PAGE>

SALE OF ARRAY ASSETS

In March 2000, the Company entered into a Strategic Alliance agreement with
ePHONE Telecom, Inc. ("ePHONE") related to the business of its wholly-owned
subsidiary, Array Telecom Corporation. Pursuant to the agreement, the Company
sold certain fixed assets and products, and provided a license in certain
intellectual property for a five-year term to ePHONE. The agreement also allowed
ePHONE to utilize the name "Array" and provided ePHONE with access to its
distribution channels. ePHONE paid Array on the closing date $2.7 million in
cash and is required to pay royalty fees to the Company based on certain gross
sales over a five-year period. The Company had been recognizing the gain of $1.9
million into income over a five-year period from the date of closing. Due to
ePHONE filing for arbitration against the Company on October 2, 2001 and the
subsequent termination of the agreement (see Note 13), Comdial ceased to
recognize any gain during the fourth quarter of 2001. As of December 31, 2001,
the balance of the deferred gain amounts to $1.3 million.

NOTE 3.  INVENTORIES

Inventory consists of the following:
----------------------------------------------------------
December 31,
In thousands                                2001      2000
----------------------------------------------------------
     Finished goods                       $5,040   $ 7,064
     Work-in-process                           -        80
     Materials and supplies                4,487     8,287
                                          ------   -------
       Total                              $9,527   $15,431
                                          ======   =======
----------------------------------------------------------

Comdial provides reserves to cover product obsolescence and those reserves
impact gross margin. Reserves for inventory obsolescence amounted to $4.0
million and $5.4 million as of December 31, 2001 and 2000, respectively. Future
reserves will be dependent on management's estimates of the recoverability of
costs from inventory.

In the fourth quarter of 2000, the Company decided to outsource the majority of
its manufacturing operations. As a result, the Company recorded a lower of cost
or market adjustment of its inventory in the amount of $2.4 million to reduce
the carrying value of its materials inventory.

The Company purchases substantially all of its finished goods from three
outsource manufacturers.

NOTE 4.  PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

-----------------------------------------------------------------
December 31,
In thousands                                     2001        2000
-----------------------------------------------------------------
Buildings  and leasehold improvements        $    618    $ 11,905
Land and land improvements                          -         692
Machinery and equipment                        11,174      32,501
Computer hardware equipment and tooling         4,400       7,830
Computer software for internal use              3,354       3,291
Less accumulated depreciation                 (13,707)    (37,466)
                                             --------    --------
 Property and equipment - Net                $  5,839    $ 18,753
                                             ========    ========
-----------------------------------------------------------------

Depreciation expense charged to operations for the years 2001, 2000 and 1999,
was $3.0 million, $4.4 million and $3.6 million, respectively.

                                       45
<PAGE>

Due to the Company's decision to outsource the majority of its manufacturing
operations, management determined through an impairment analysis that certain of
its fixed assets associated with manufacturing were impaired. Accordingly, the
Company recognized impairment losses on its property and equipment of $1.0
million and $0.3 million in fiscal 2001 and 2000, respectively. See Note 16.

NOTE 5. LEASE OBLIGATIONS

Comdial has 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,        Capital      Operating
In thousands                     Leases        Leases
-------------------------------------------------------------------------------
  2002                           $  313       $2,941
  2003                              329        2,186
  2004                            2,748          734
  2005                            1,797          727
  2006                                -          726
  thereafter                          -        1,512
                                 ------       ------
Total minimum lease
 commitments                     $5,187       $8,826
                                 ======       ======
 Less amounts representing
  interest and other costs       (2,049)
                                -------
 Principal portion of
  minimum lease commitments
  at December 31, 2001
  including current amounts
  of $42                         $3,138
                                 ======
-------------------------------------------------------------------------------

Assets recorded under capital leases (included in property and equipment in the
accompanying Consolidated Balance Sheets) are as follows:

-------------------------------------------------------------------------------
December 31,
In thousands                         2001      2000
--------------------------------------------------------------------------------
    Capitalized software           $  -       $  669
    Less accumulated
     amortization                     -          (77)
                                   -------    ------
     Capitalized software - Net    $  -       $  592
                                   =======    ======
--------------------------------------------------------------------------------

For 2000, Comdial entered into new capital lease obligations that amounted to
approximately $1.3 million. All capital lease balances as of December 31, 2001
and 2000, are for software originally planned to be used internally.
Amortization of assets recorded under capital leases is included in depreciation
expense. During the fourth quarter of 2000, the Company determined that certain
assets associated with these capital lease obligations were impaired (See Note
16). The capital lease amounts associated with the impaired assets continue to
remain recorded as an obligation of the Company.

Operating leases 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, 2001, 2000 and 1999, were
$1.6 million, $3.7 million and $2.7 million, respectively.

                                       46
<PAGE>

NOTE 6.  DEBT

Long-term debt consists of the following:
---------------------------------------------------------------------------
December 31,
In thousands                                        2001               2000
---------------------------------------------------------------------------
   Revolver (1)                                  $16,500            $16,624
   Term Loan (1)                                   6,404             18,500
   Capital Leases (2)                              3,578              3,285
   Notes Payable (3)                                 947                  -
   Promissory Note (4)                             2,079                  -
                                                 -------            -------
     Total Debt                                  $29,508             38,409
   Less current maturities on debt                 2,596             24,848
                                                 -------            -------
     Total long-term debt                         26,912            $13,561
                                                 =======            =======
---------------------------------------------------------------------------

(1)  Both the Revolver and the Term Loan, made pursuant to the Credit Agreement
     with Bank of America, carried an interest rate based on Prime plus a 300
     basis points margin. As of December 31, 2001, Comdial's borrowing rate was
     8.00%, which includes the additional applicable margins.

     The Company could use the Revolver with Bank of America for working capital
     and for other general corporate purposes. As of December 31, 2001, the
     Company had no additional availability under the Revolver or the Term Loan.

     As of April 10, 2001, Comdial and Bank of America, N.A. ("Bank of America")
     agreed to new terms related to its revolving credit facility and Term Loan.
     The terms as set forth in the Amended and Restated Agreement were as
     follows:

        .  The revolving credit facility ("the Revolver") remained at $16.5
           million. Comdial was allowed to utilize the facility provided that
           the collateral was not less than $13.5 million through September 30,
           2001, $14.0 million through October 31, 2001, and $16.0 million
           through November 30, 2001. Furthermore, the facility's maturity had
           been extended until March 31, 2002.

        .  The Term Loan principal payment of $2.5 million due September 30,
           2001 was replaced by an amount necessary to reduce the debt to $5
           million. The expected amount was $1.3 million. The remaining balance
           of the term loan of approximately $5.0 million was due as follows:
           $2.5 million on December 20, 2001 and $2.5 million on March 31, 2002.

        .  The Earnings Before Income Taxes and Depreciation and Amortization
           ("EBITDA") covenant was replaced by a minimum EBITDA for June 30,
           September 30, and December 31, 2001 equivalent to $1.9 million, $6.0
           million, and $9.7 million, respectively. The EBITDA covenant was
           measured on a cumulative basis from April 1, 2001.

     The Company did not make the required principal payment of $1.3 million on
     September 30, 2001. In December  2001, Bank of America and the Company
     agreed to waive the December 31, 2001 principal payment as well as the
     minimum EBITDA covenant for the third and fourth quarters of 2001 until
     January 15, 2002 and then extended it again until February 28, 2002.

                                       47
<PAGE>


     On March 6, 2002, Comdial and Bank of America entered into the First
     Amendment to the Amended and Restated Credit Agreement (the "First
     Amendment") which reduced the Revolver commitment to $8 million, reduced
     the Term Loan to approximately $4.9 million and agreed to extend the $1.5
     million in letters of credit until March 31, 2003. Both the Revolver and
     the Term Loan mature March 31, 2003.

     The First Amendment changed the schedule of principal payments on the Term
     Loan balance. The term note will start amortizing in September 2002 using a
     36-month amortization schedule. The First Amendment also changed the
     applicable interest rate to an interest rate based on the Prime Rate plus a
     specified margin. Effective as of March 6, 2002, the interest rate is equal
     to the Prime Rate plus four percent. As of March 6, 2002, Comdial had no
     additional availability under the Revolver or the Term Loan.

     Comdial's indebtedness to Bank of America under the Credit Agreement, as
     amended by the First Amendment, is secured by liens on all of Comdial's
     properties and assets. The First Amendment modified the financial covenants
     relating to consolidated net income and contained other covenants related
     to consolidated net worth and cross default provisions. The First Amendment
     also provided for the waiver of all 2001 violations and defaults.

     In addition to the terms discussed above, in connection with the First
     Amendment, $10 million of outstanding debt of Comdial to Bank of America
     was converted into Series B Alternate Rate Cumulative Convertible
     Redeemable Preferred Stock, par value $10 per share (the "Preferred
     Stock"). Comdial issued 1,000,000 shares of the Preferred Stock to Bank of
     America. The Preferred Stock can be converted at any time into a maximum of
     1.5 million shares of Comdial common stock. This conversion ratio will be
     reduced to as low as 500,000 shares of common stock in the event Comdial
     elects to pay down the term note by up to $3 million in connection with new
     investment into the Company by an outside investor. Comdial has a call
     option allowing it to buy out Bank of America's Preferred Stock at par
     value, but Bank of America has no mandatory redemption. The Preferred Stock
     has a 5 percent cumulative annual dividend if paid with cash or 10 percent
     if paid in common stock, at the election of Comdial. The shares of common
     stock issuable to Bank of America upon conversion of the Preferred Stock
     and as payment of dividends are subject to certain demand and piggyback
     registration rights pursuant to a registration rights agreement which will
     require the Company to register such shares of common stock for resale in
     the public market upon request.

     Due to the restructuring discussed above, $22.4 million due to Bank of
     America has been excluded from current liabilities at December 31, 2001, in
     accordance with SFAS No. 6, "Classification of Short-Term Obligations
     Expected to be Refinanced".

(2)  The Company has a Master Lease Agreement with Relational Funding
     Corporation and its assignees (collectively "RFC"). This agreement covers
     certain leases related to an abandoned software implementation and hardware
     for internal use. Effective August 1, 2001, the Company and RFC entered
     into an agreement to restructure the payment schedule for both the
     operating and capital leases as follows: Beginning August 1, 2001, the
     operating and capital lease monthly payments were reduced from $150,000 to
     $75,000 per month. The monthly operating lease payments were reduced by 25%
     and the capital lease payments by 75%. The difference between the original
     payments and the reduced payments will be deferred until the end of each of
     the lease terms at which time all deferred amounts and accrued interest
     related to such will be due. Interest on the deferred amounts will be
     accrued at a rate of 10% per annum. As of December 31, 2001 the Company was
     in default on its payments to RFC. On March 21, 2002, the Company and RFC
     reached agreement to reduce the total payments due under the operating and
     capital leases from a combined balance of approximately $5.5 million to a
     payout schedule over 72 months totaling approximately $2.3 million. For the
     first 30 months, the monthly payment is $39,621, which then reduces to
     $25,282. In addition, Comdial agreed to provide RFC warrants to purchase
     175,000 shares of the common stock of the Company for $0.61 per share,
     which have an estimated fair market value of approximately $0.1
     million.

                                       48
<PAGE>


   (3) The Company has unsecured notes payable in the amount of $0.9 million
       outstanding as of December 31, 2001. The notes have interest rates
       ranging from 0% to 14.5%. Monthly principal and interest payments on the
       notes total $60,000. One of the notes has quarterly principal payments of
       $25,000 plus interest. Maturity dates on the notes range from December
       2001 to September 2004. As of March 2002, the notes have been
       renegotiated to an outstanding balance of $0.2 million.

   (4) On October 12, 2001, the Company signed a promissory note with one of its
       suppliers that converts $2.1 million in accounts payable owed to the
       supplier to a long-term note. The note bears interest at 7.5% per annum.
       Principal and interest payments are due monthly through June 2003. In
       February 2002, this note was canceled (see Note 17).

NOTE 7.  INCOME TAXES

The components of the income tax expense  (benefit) for the following years
ended December 31 are as follows:

------------------------------------------------------
In thousands                  2001      2000      1999
------------------------------------------------------
     Current -  Federal      $   -   $   (40)   $  410
                State            -       (16)      133
     Deferred - Federal          -    14,200     1,573
                State            -     1,256       574
                             -----   -------    ------
       Total provision       $   -   $15,400    $2,690
                             =====   =======    ======
------------------------------------------------------

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

-------------------------------------------------------------------------------
In thousands                                    2001        2000        1999
-------------------------------------------------------------------------------
    Federal tax at statutory rate
    (35% in 2001, 2000, and 1999)             $(7,408)   $(16,752)   $  3,512
    State income taxes (net of federal tax
      benefit)                                 (  779)        806         764
    Nondeductible charges                          52          40         707
    Other adjustments                          (  143)        197        (124)
    Expiring business credits                                  66         504
    Adjustment of valuation allowance           8,278      31,043      (2,673)
                                              -------    --------    --------
      Income tax provision                    $    -     $ 15,400    $  2,690
                                              =======    ========    ========
--------------------------------------------------------------------------------

No net deferred tax assets have been recognized in the accompanying Consolidated
Balance Sheets at December 31, 2001 and 2000, respectively. The components of
the net deferred tax assets (liabilities) at December 31, 2001 and 2000 are as
follows:

-------------------------------------------------------------------------------
Deferred Assets (Liabilities)                            December 31,
In thousands                                      2001                  2000
--------------------------------------------------------------------------------
     Net loss carryforwards                     $20,839              $ 13,918
     Tax credit carryforwards                     1,411                 1,411
     Inventory                                    1,774                 3,274
     Pension                                          -                   128
     Postretirement                                 281                   287
     Compensation and benefits                    1,357                 1,818
     Capitalized software development costs       1,746                 2,838
     Other deferred tax assets                    3,257                 1,510
     Goodwill                                     5,407                 5,151
     Research and development expenditures        6,786                 4,515
     Allowance for bad debts                      1,331                 1,067
                                                -------              --------
        Total deferred tax assets                44,189                35,917

     Fixed asset depreciation                    (1,771)               (1,776)
                                                -------              --------
        Total deferred tax liabilities           (1,771)               (1,776)

     Net deferred tax assets                     42,418                34,141
     Less:  Valuation allowance                 (42,418)              (34,141)
                                               --------              --------
        Total                                  $      -              $      -
                                               ========              ========
-------------------------------------------------------------------------------

                                       49
<PAGE>

Comdial periodically reviews the requirements for a valuation allowance and
makes adjustments to such allowances when changes in circumstances result in
changes in management's judgment about the future realization of deferred tax
assets. Due to the three-year cumulative basis losses, the Company recorded a
valuation allowance equal to its net deferred tax assets of $42.4 million and
$34.1 million for the years ended December 31, 2001 and 2000, respectively.
For the years ended December 31, 2001, 2000 and 1999, the Company recorded an
increase of its valuation allowance of $8.3 million, $33.8 million, and a
decrease of $2.7 million, respectively.

At December 31, 2001 Comdial had net operating loss and credit carryovers of
approximately $55.9 million expiring beginning in 2002 through the year 2021.

NOTE 8:  EARNINGS (LOSS) PER SHARE

Unexercised options to purchase 1,021,990; 1,051,653 and 1,079,788 shares of
common stock for the years ended December 31, 2001, 2000 and 1999, respectively,
were not included in the computations of diluted loss per share because assumed
conversion would be antidilutive.

The following table discloses the annual EPS information for the years ended
December 31, 2001, 2000 and 1999.

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------
<S>                                                    <C>         <C>         <C>
In thousands except per share data                         2001        2000      1999
-------------------------------------------------------------------------------------

   Basic:
   Net loss                                            ($21,799)   ($63,264)   $7,343
                                                        =======     =======    ======
   Weighted average number of common
    shares outstanding during the period                  9,201       9,170     8,934
   Add - Deferred shares                                     10          18        14
                                                        -------     -------    ------
   Weighted average number of shares used in cal-
    culation of basic earnings per common share           9,211       9,188     8,948
                                                        =======     =======     =====

   Basic EPS                                             ($2.37)     ($6.89)   $  .82
                                                        =======     =======    ======
   Diluted:
   Net loss                                            ($21,799)   ($63,264)   $7,343
                                                        =======     =======    ======

   Weighted average number of shares used in cal-
    culation of basic earnings per common share           9,211       9,188     8,948
   Effect of dilutive stock options                           -           -        41
                                                        -------     -------    ------

 Weighted average number of shares used in cal-
 culation of diluted earnings per common share            9,211       9,188     8,989
                                                        =======     =======    ======

Diluted EPS                                              ($2.37)     ($6.89)   $  .82
                                                        =======     =======    ======
</TABLE>

During the years ended December 31, 2001, 2000 and 1999, 8,500, 262,040, and
8,228 options were exercised at a weighted average exercise price of $0, $8.15,
and $2.34, respectively.

NOTE 9.  PENSION AND SAVINGS PLANS

Comdial currently has two pension plans that provide benefits based on years of
service and an employee's compensation during the employment period. One plan is
a qualified plan for all employees of Comdial and the other, which was initiated
in April 1999, is a non-qualified plan ("Retirement Benefit Restoration Plan").
The non-qualified plan is strictly for executive officers and/or highly
compensated employees who are designated as a participant of the plan by the
Compensation Committee of Comdial. The non-qualified plan is not funded.

                                       50
<PAGE>

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.

In July 2000, the Company froze the Retirement Benefit Restoration Plan, and in
September 2000, the Company froze the qualified pension plan, thereby
eliminating any further benefit accrual by employees in either of the plans.
This action by the Company resulted in a one-time curtailment loss of $0.5
million. In addition, the Company recognized a settlement gain of $0.1 million
on the payment of lump-sum retirement benefits to certain of its employees under
the Retirement Benefit Restoration Plan, in 2000.

<TABLE>
<CAPTION>

The following table sets forth the change in projected benefit obligations of
the pension plans during 2001 and 2000.

------------------------------------------------------------------------------------------------------------------------------
In thousands                                                                               2001                          2000
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                             <C>
    Benefit obligation at beginning of year                                            $ 25,603                       $25,786
    Service cost                                                                              -                         1,051
    Interest cost                                                                         1,870                         1,938
    Actuarial loss (gain)                                                               (   494)                        1,019
    Benefits paid                                                                       ( 1,546)                       (1,776)
    Curtailment adjustment                                                                    -                        (2,559)
    Settlement adjustment                                                                     -                           144
                                                                                       --------                       -------
       Benefit obligation at end of year                                               $ 25,433                       $25,603
                                                                                       ========                       =======
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

The following tables sets forth the change in plan assets of the pension plans
and amounts recognized in Comdial's Consolidated Balance Sheets at December 31,
2001 and 2000.

---------------------------------------------------------------------------
In thousands                                               2001       2000
---------------------------------------------------------------------------
    Fair value of plan assets at beginning of year      $25,170    $24,080
    Actual return on plan assets                          1,873        907
    Employer contribution                                     -      1,959
    Benefits paid                                        (1,546)    (1,776)
                                                        -------    -------
       Fair value of plan assets at end of year         $25,479    $25,170
                                                        =======    =======

Funded status                                           $    64    $  (433)
Unrecognized actuarial gain                                (253)       (71)
Unrecognized prior service cost                               -          -
                                                        -------    -------
Net amount recognized                                   $ ( 189)   $  (504)
                                                        =======    =======
Amounts recognized in the Consolidated Balance
    Sheets consist of:
    Prepaid benefit cost                                $ 2,147    $ 1,678
    Accrued benefit liability                            (2,336)    (2,182)
                                                        -------    -------
      Net amount recognized                             $  (189)   $  (504)
                                                        =======    =======
-------------------------------------------------------------------------------

The Retirement Benefit Restoration Plan has projected benefit obligations of
$1.2 million and $2.0 million at December 31, 2001 and 2000, respectively, with
no plan assets.


Assumptions used in accounting for the plans as of December 31 were as follows:

                                          2001          2000          1999
-------------------------------------------------------------------------------
 Discount rate                            7.25%         7.50%         8.00%
 Expected return on plan assets           9.00%         9.00%         9.00%
 Rate of compensation increase             N/A          4.50%         4.50%
-------------------------------------------------------------------------------

                                       51
<PAGE>

Net periodic pension cost (benefit) for 2001, 2000 and 1999 included the
following components:

-------------------------------------------------------------------------------
In thousands                               2001          2000          1999
-------------------------------------------------------------------------------
 Service cost                            $    -        $ 1,051       $ 1,758
 Interest cost                            1,870          1,938         1,692
 Expected return on plan assets               -         (2,050)       (1,777)
 Amortization of prior service cost      (2,185)           186           124
 Settlement gain                              -           (112)            -
 Curtailment loss                             -            464             -
 Recognized actuarial loss (gain)             -            (17)           68
                                        -------        -------       -------
  Net periodic pension cost (benefit)   $ ( 315)       $ 1,460       $ 1,865
                                        =======        =======       =======
-------------------------------------------------------------------------------

In addition to these pension benefits, Comdial contributes to a 401(k) plan,
based on employee's contributions. Participants can contribute from 1% to 17% of
their salary and Comdial will match contributions equal to 50% of the
participant's contribution up to the first 6%. Comdial's total expense for the
matching portion of the 401(k) plan for 2001, 2000 and 1999 was $0.4 million,
$0.6 million and $0.6 million, respectively.

NOTE 10.  POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Comdial provides certain health care coverage (until age 65), which is
subsidized by the retiree through insurance premiums paid to Comdial, and life
insurance benefits for substantially all of its retired employees. The effect of
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," on operating income for 2001 was income of $0, compared to income for
2000 of $12,000 and expense for 1999 of $137,000. The postretirement benefit
obligation is not funded and does not include any provisions for securities,
settlement, curtailment, or special termination benefits. In 1993, when SFAS No.
106 went into effect, Comdial elected to amortize the cumulative effect of this
obligation over 20 years (see unrecognized transition obligation in the table
below).

During fiscal 2000, Comdial eliminated this benefit, except to the extent
employees had already earned them, and ceased to accrue any additional
postretirement benefits under the program previously accounted for in accordance
with SFAS No. 106. The postretirement benefit obligation was reduced by $0.7
million with a corresponding decrease to the unrecognized transition obligation.
The effects of this transaction on fiscal 2000 earnings were negligible.

The following table sets forth the change in postretirement  benefit obligations
and amounts recognized in Comdial's  Consolidated Balance Sheets at December 31,
2001 and 2000.

--------------------------------------------------------------
In thousands                                   2001      2000
--------------------------------------------------------------
 Benefit obligation at beginning of year      $ 388    $1,074
 Service cost                                     4         4
 Interest cost                                   29        27
 Plan participants' contributions                 5        13
 Actuarial loss/(gain)                            6        17
 Benefits paid                                  (20)      (40)
 Curtailment effect                               -      (707)
                                              -----    ------
Benefit obligation at December 31             $ 412    $  388
                                              =====    ======
-------------------------------------------------------------

                                       52
<PAGE>

The following  tables set forth the change in plan assets of the  postretirement
benefits and amounts  recognized  in Comdial's  Consolidated  Balance  Sheets at
December 31, 2001 and 2000.

-------------------------------------------------------------------------------
In thousands                                                2001     2000
-------------------------------------------------------------------------------
  Fair value of plan assets at beginning of year           $   -     $   -
  Employer contribution                                       15        27
  Plan participants' contributions                             5        13
  Benefits paid                                             ( 20)      (40)
                                                           -----     -----
   Fair value of plan assets at December 31                $  -      $   -
                                                           =====     =====

Funded status                                              $(412)    $(388)
  Unrecognized transition obligation                         401       438
  Unrecognized actuarial gain                               (735)     (812)
                                                           -----     -----
Accrued benefit cost                                       $(746)    $(762)
                                                           =====     =====

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

Assumptions used in accounting for the plans as of December 31 were as follows:
-------------------------------------------------------------------------------
                                                     2001      2000    1999
-------------------------------------------------------------------------------
 Discount rate                                       7.25%     7.50%   8.00%
-------------------------------------------------------------------------------

For measurement purposes, a 6.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2001. The rate was assumed to
decrease gradually to 5.25% for 2005 and remain at that level thereafter.

Net periodic  postretirement  (benefit) cost for 2001, 2000, and 1999,  included
the following components:

-------------------------------------------------------------------------------
In thousands                         2001              2000              1999
-------------------------------------------------------------------------------
    Service cost                    $   3              $   4             $  37
    Interest cost                      29                 27                74
    Amortization of unrecognized
     transition obligation             37                 37                91
    One-time curtailment income         -                 (6)
    Recognized actuarial gain         (69)               (74)              (65)
                                    -----              -----             -----
        Net postretirement
          (benefit) cost            $   -               ($12)            $ 137
                                    =====              =====             =====
-------------------------------------------------------------------------------

Assumed health care cost trend rates could have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
-------------------------------------------------------------------------------
In thousands
                                               One-percentage    One-percentage
                                               Point Increase    Point Decrease
Effect on total of service and interest            $   1               ($1)
    cost components
Effect on postretirement benefit obligation        $  27              ($27)
-------------------------------------------------------------------------------

                                       53
<PAGE>

NOTE 11.  STOCK-BASED COMPENSATION PLANS

As of December 31, 2001, Comdial had two stock-based compensation plans. The
1992 Stock Incentive Plan (the "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 Comdial's
Common Stock for each fiscal year Comdial reports income. In January 1997, 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 Comdial's
common stock automatically awarded to non-employee directors under such
circumstances. In 2000, each non-employee director was awarded 2,500 shares
related to income earned by Comdial for fiscal year 1999. No amounts were
awarded for 2000 or 2001. The plans are composed of stock options, restricted
stock, nonstatutory stock, and incentive stock. Comdial's incentive plans are
administered by the Compensation Committee of Comdial's Board of Directors.

As of December 31, 2001, there were 2.0 million shares of Comdial's Common Stock
reserved for issuance under the Incentive Plan that was approved by the
stockholders in 1996, including 0.2 million shares of Comdial's Common Stock
reserved for issuance under the Directors Stock Incentive Plan. Of this amount,
0.5 million shares had not been granted under either plan. Comdial 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 $0, $0 and $150,000 at December 31, 2001, 2000 and 1999,
respectively, and have been deducted from Stockholders' Equity (Deficit).

Options granted in 2001 and 2000 have a maximum term of ten years and vest in
installments of 50%, 25% and 25% per year on each of the first through the third
anniversaries of the grant date. Options issued in 1999 vest in installments of
33% per year on each of the first through the third anniversaries of the grant
date. All options granted through the Incentive Plan are granted at an exercise
price equal to the market price of Comdial's Common Stock on the grant date.


Information regarding stock options granted under the Incentive Plan is
summarized below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                      2001      (1)        2000       (1)         1999       (1)
-------------------------------------------------------------------------------------------------------------------
<S>                                              <C>           <C>      <C>           <C>      <C>           <C>
Options outstanding,
    January 1;                                    1,051,653    $5.42     1,079,788    $8.66     1,104,213    $8.93
    Granted                                         724,852      .77       728,500     3.34       220,433     7.51
    Exercised                                        (8,500)     .00      (262,040)    8.15        (8,228)    2.34
    Terminated                                     (746,015)    5.51      (494,595)    8.21      (236,630)    9.08
                                                 ----------    -----    ----------    -----    ----------    -----
       Options outstanding,
       December 31;                               1,021,990     2.95     1,051,653     5.31     1,079,788     8.66
                                                 ==========    =====    ==========    =====    ==========    =====
    Options exercisable,
    December 31;                                    406,437     2.97       265,755     8.96       598,468     8.57
    Per share ranges of options outstanding
       at December 31                            $0.28 - $13.50         $1.41 - $13.50         $1.41-$13.50
    Dates through which options outstanding
      at December 31,
       were exercisable                          1/2002 - 12/2011       1/2001-12/2010         1/2000-12/2009
</TABLE>
(1)  Weighted-average exercise price at grant date.

                                       54
<PAGE>

The following table summarizes  information concerning currently outstanding and
exercisable options at December 31, 2001:
<TABLE>
<CAPTION>

                               Options Outstanding                   Options Exercisable
                   -----------------------------------------     ---------------------------
                                     Weighted-
                        Number        Average     Weighted-        Number       Weighted-
Range of              Outstanding    Remaining     Average       Exercisable     Average
Exercise                  at        Contractual   Exercise           at         Exercise
 Prices                12/31/01        Life          Price         12/31/01      Price
--------------------------------------------------------------------------------------------
<S>                   <C>           <C>           <C>            <C>        <C>
$  0.28 to  1.35         434,936         9.4       $  0.40         199,436       $  0.27
$  1.35 to  2.70         368,087         8.5          1.88          84,066          1.87
$  2.70 to  4.05          10,001          .3          3.00          10,001          3.00
$  5.40 to  6.75           3,833         2.8          5.79           3,833          5.79
$  6.75 to  8.10          32,716         6.1          7.57          24,164          7.55
$  8.10 to  9.45          32,261         4.2          8.87          32,261          8.87
$  9.45 to 10.80           4,000         2.1         10.59           4,000         10.59
$ 10.80 to 12.15          28,926         6.0         10.94          28,926         10.94
$ 12.15 to 13.50         107,250         8.2         12.54          19,750         12.73
                       ---------     -------                      --------
0.28 to 13.50          1,021,990         8.5       $  2.95         406,437       $  2.97
                       =========    ========       =======        ========       =======
</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:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                         2001            2000          1999
--------------------------------------------------------------------------------------------
<S>                                    <C>              <C>              <C>
  Risk-free interest rate               3.039%          6.03%           5.15%
  Expected life                          7.36           5.10             6.5
  Expected volatility                   110.3%            87%             65%
  Expected dividends                     none            none            none
--------------------------------------------------------------------------------------------
</TABLE>

If compensation cost for Comdial'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 prescribed by SFAS No. 123, Comdial's net income (loss) and
earnings (loss) per share would have been shown in the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
 --------------------------------------------------------------------------------------------
<S>                                          <C>               <C>              <C>
In thousands except per share amounts            2001          2000         1999

  Net (loss) income:    As reported              $(21,799)   $(63,264)      $ 7,343
                        Additional
                          Compensation
                          expense                   1,055       1,360         1,327
                        Pro forma                $(22,854)   $(64,624)      $ 6,016

  Basic (loss) earnings per share:
                        As reported              $  (2.37)   $  (6.89)      $  0.82
                        Pro forma                   (2.48)   $  (7.03)      $  0.67
  Diluted (loss) earnings per share:
                        As reported              $  (2.37)   $  (6.89)      $  0.82
                        Pro forma                   (2.48)   $  (7.03)      $  0.67
--------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted in which the option price
equaled the fair market value of the Company's stock on the date of grant is
$0.51, $2.74 and $6.14 for the years ending December 31, 2001, 2000 and 1999
respectively.

NOTE 12.  SEGMENT INFORMATION

During 2001 and 2000, substantially all of the Company's sales, net income, and
identifiable net assets were attributable to the telecommunications industry
with over 98% of sales occurring in the United States.

                                       55
<PAGE>

In the fourth quarter of 2000, the Company adopted a Restructuring Plan, the
principal terms of which are discussed in Note 15 below. In 2001, pursuant to
this plan, the Company discontinued the prior organization and consolidated its
Strategic Business Unit ("SBU") segments that were defined as Comdial Convergent
Communications Corporation, Comdial Enterprise Solutions, Inc., Key Voice
Technologies, Comdial Business Communications Corporation and Array. The
consolidation of these business units resulted in the organization of product
segments to correspond with the industry background of primary business and
product offerings which fall into three categories: (1) voice switching systems
for small to mid-size businesses, (2) voice messaging systems, and (3) computer
telephony integration ("CTI") applications and other. Each of these categories
is considered a business segment, and with respect to their financial
performance, the costs associated with these segments can only be quantified and
identified to the gross profit level for each segment. These three product
segments comprise substantially all of Comdial's sales to the telecommunications
market.

The information in the following tables is derived directly from the segments
internal financial reporting used for management purposes. Unallocated costs
include operating expenses, goodwill amortization, interest expense, other
miscellaneous expenses, and income tax expense. Comdial does not maintain
information that would allow assets, liabilities, or unallocated costs to be
broken down into the various product segments as most of these items are shared
in nature.

The following tables show segment information for the years ended December 31:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
<S>                               <C>          <C>          <C>
(In thousands)                         2001         2000         1999
---------------------------------------------------------------------
Business Segment Net Sales
 Switching                        $  53,511    $  49,545     $ 81,868
 Messaging                           15,183       28,014       38,907
 CTI & Other                          7,473       12,005       19,982
                                  ---------    ---------     --------
  Net sales                       $  76,167    $  89,564     $140,757
                                  =========    =========     ========
---------------------------------------------------------------------
 (In thousands)                        2001         2000         1999
---------------------------------------------------------------------
Business Segment Profit
 Switching                        $  13,702    $   5,646     $ 29,148
 Messaging                            8,967       13,248       21,943
 CTI & Other                            445       (7,045)       4,112
                                  ---------    ---------     --------
  Gross profit                       23,114       11,849       55,203
 Operating expenses                  43,147       55,879       43,251
 Interest expense, net                2,759        2,902        1,633
 Miscellaneous expense - net            454          932          286
Gain on sale of assets              ( 1,447)           -            -
                                  ---------    ---------     --------
  Loss before income taxes         ($21,799)    ($47,864)    $ 10,033
                                  =========    =========     ========
</TABLE>

--------------------------------------------------------------------------------
Comdial had sales in excess of 10% of net sales to three customers as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
<S>                                     <C>        <C>        <C>
In thousands                               2001       2000       1999
----------------------------------------------------------------------
 Sales:
    ALLTEL Supply, Inc.                 $ 9,148    $14,563    $24,393
    Graybar Electric Company, Inc.       29,770     24,683     34,750
    Sprint/North Supply, Inc.            11,007     16,035     25,323

 Percentage of net sales:
    ALLTEL Supply, Inc.                      12%        16%        17%
    Graybar Electric Company, Inc.           39%        28%        25%
    Sprint/North Supply, Inc.                14%        18%        18%

Net sales of all three:
    Switching                            46,272    $49,894    $75,517
    Messaging                             3,653      5,387      8,949
                                        -------    -------    -------
    Net sales                           $49,925    $55,281    $84,466
                                        =======    =======    =======
</TABLE>
--------------------------------------------------------------------------------

                                       56
<PAGE>

NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES

Comdial currently and from time to time is involved in litigation arising in the
ordinary course of its business. Those that the Company believes may have a
significant impact on it are described below. Comdial can give no assurance that
the resolution of any particular claim or proceeding would not have a material
adverse effect on its results of operations, cash flows or financial condition.

On March 5, 2001, William Grover, formerly a senior vice president of Comdial,
filed suit in state court in Charlottesville, Virginia alleging breach of an
employment contract and defamation, and seeking compensatory, punitive and
exemplary damages in the total amount of $1.9 million, plus interest. Among
other things, Mr. Grover claims that the for-cause termination of his employment
was unjustified and that he is therefore entitled to all benefits accrued to him
pursuant to the Company's executive retirement plan. The Company removed this
case to the federal district court for the Western District of Virginia, because
Mr. Grover's state law claims against Comdial are preempted by federal law,
specifically ERISA. Presently, Mr. Grover is seeking to remand the case back to
state court. Comdial believes it has adequate substantive and procedural
defenses against all claims made against Comdial in this matter and no amounts
have been accrued.

On October 5, 2000, William G. Mustain resigned as president and chief executive
officer of Comdial. On the same date, Comdial agreed to pay Mr. Mustain his
normal salary for the remainder of 2000 plus severance in the amount of $0.1
million per year for three years beginning on January 1, 2001. Mr. Mustain was
also entitled to be paid approximately $1.7 million in three installments over a
15 month period plus certain fringe benefits under Comdial's Retirement Benefit
Restoration Plan (the "Plan"). In 2001, Comdial made the initial payment of $0.6
million under the Plan. However, on June 30, 2001, Comdial notified Mr. Mustain
that it would not make payment of the second $0.6 million installment due under
the Plan because of its financial condition, as permitted under the terms of the
agreement with Mr. Mustain. On December 27, 2001, Comdial reached agreement with
Mr. Mustain on modified terms with respect to the remaining amounts due to him.
In lieu of those remaining amounts due of $1.1 million, Comdial agreed to pay
Mr. Mustain a total of approximately $0.3 million, payable in five annual
installments commencing in 2004. No gain will be recognized until the Plan is
liquidated. Comdial also agreed to continue to pay Mr. Mustain the
aforementioned severance pay through the three-year severance period that
expires on December 31, 2003. All amounts due Mr. Mustain have been accrued as
of December 31, 2001.

On September 28, 2001, Baisch & Skinner, Inc. ("Baisch") filed suit against
Comdial and a second defendant, Barron Communications, Inc. ("Barron") in St.
Louis County, Missouri, alleging multiple counts of breach of contract and
breach of warranty in connection with an agreement involving the installation by
Barron of a communications system at Baisch's place of business. The suit seeks
$78,000 in compensatory damages and unspecified incidental and consequential
damages, interest and costs. Comdial believes it has ample defenses to the
claims alleged in this matter. The matter is currently in the discovery phase.
No amounts have been accrued.

On October 2, 2001, ePHONE Telecom, Inc. filed for arbitration against Comdial
in Washington, DC, alleging fraud in the inducement, among other things, arising
from the alleged breach of an asset purchase and software license agreement.
ePHONE is seeking rescission of the agreement and a return of the full amount of
$2.7 million paid to us thereunder. Comdial will vigorously defend itself
against ePHONE's allegations and it has filed counterclaims against ePHONE for
an amount in excess of $2.0 million based on ePHONE's failure to make minimum
royalty payments due under the agreement and for loss of future revenues based
on ePHONE's breach of the agreement and the resulting termination thereof. On
March 20, 2002, ePHONE requested leave to clarify its original claim by
asserting $5.0 million in compensatory damages and $5.0 million in punitive
damages in addition to the damages described above. No ruling has been made on
that request. Comdial believes it has ample defenses to the claims alleged
against Comdial in this matter. No amounts have been accrued.

                                       57
<PAGE>

On November 2, 2001, Comdial reached a settlement of a lawsuit filed against the
Company by Rates Technology Inc. ("RTI") in the Eastern District of New York
alleging that certain of its products had infringed an expired patent held by
RTI. According to the settlement agreement, Comdial agreed to pay an amount not
in excess of $0.5 million pursuant to a promissory note payable in quarterly
installments through August 2004 in exchange for dismissal of the suit against
Comdial and King Technologies, Inc. ("King"). King had been named as an
additional defendant in the suit under an amendment by RTI to its initial
complaint. The specific financial terms of the settlement are confidential. As
of December 31, 2001, the settlement amount had been accrued. On February 13,
2002, Comdial reached agreement with RTI on modified payment terms under the
aforementioned promissory note. The note has been paid in full.

NOTE 14.  QUARTERLY FINANCIAL DATA (UNAUDITED)

The following presents the Company's quarterly financial data for the last two
years:

----------------------------------------------------------------
In thousands except                       First         Second
per share amounts                        Quarter        Quarter
----------------------------------------------------------------
2001
    Net Sales                            $18,115       $ 20,261
    Gross profit                           7,801          7,915
    Goodwill amortization                    671            425
    Interest expense                         690            598
    Net loss                              (1,092)        (2,766)
    Net loss per
    common share: Basic                    (0.12)         (0.30)
                  Diluted                  (0.12)         (0.30)
----------------------------------------------------------------
2000
    Net Sales                            $30,266       $ 18,506
    Gross profit                          11,843          1,546
    Goodwill amortization                    799            798
    Interest expense                         607            616
    Net loss                              (2,333)        (4,848)
    Net loss per
    common share: Basic                    (0.26)         (0.53)
                  Diluted                  (0.26)         (0.53)
----------------------------------------------------------------

In thousands except                      Third         Fourth
  per share amounts                      Quarter       Quarter
----------------------------------------------------------------
2001
    Net Sales                            $22,882       $ 14,909
    Gross profit                           7,342             56
    Goodwill amortization                    423            423
    Interest expense                         834            637
    Net loss                              (2,997)       (14,944)
    Net loss per
    common share: Basic                    (0.33)         (1.62)
                  Diluted                  (0.33)         (1.62)


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

2000
    Net Sales                            $24,049       $ 16,743
    Gross profit                           4,277         (5,817)
    Goodwill amortization                    799            799
    Interest expense                         745            934
    Net loss                              (5,137)       (50,946)
    Net loss per
    common share: Basic                    (0.56)         (5.53)
                  Diluted                  (0.56)         (5.53)
----------------------------------------------------------------

Previously reported quarterly information has been revised to reflect certain
reclassifications. These reclassifications had no effect on previously reported
consolidated net income. See Note 1.

NOTE 15.  RESTRUCTURING

In 2000, due to declining market conditions, unfavorable economic factors,
uncompetitive product costs, and excess inventory levels, the Board of Directors
and management deemed it necessary to develop a plan to restructure the Company.
This plan was approved by the Board of Directors, and implementation commenced
during the fourth quarter of 2000.

                                       58
<PAGE>

Significant terms of the restructuring plan ("the Plan") included outsourcing
the manufacturing operations, reducing the Company's workforce and selling the
headquarters and manufacturing facility. Pursuant to the Plan, 152 employees
were terminated effective December 15, 2000; another 222 employees were notified
as of December 28, 2000 that their positions would be eliminated in fiscal 2001.
The employees to be terminated were part of the manufacturing function and
related general and administrative positions in Charlottesville, Virginia. As of
December 31, 2001, a total of 342 employees have been terminated as part of the
Plan and the remaining 32 employees are expected to leave by April 2002.

On September 28, 2001, as a result of the downturn in the economy and the events
of September 11, 2001, management and the Board approved and executed a second
restructuring plan. The plan was designed to achieve certain operational and
financial efficiencies throughout the organization. A contingency plan was also
developed to quickly react if the disaster proved to cause more serious economic
effects to the company. Significant terms of the second plan included downsizing
the workforce in both the Sarasota and Charlottesville locations. Accordingly,
reductions were made across several departments including sales, finance,
manufacturing, engineering, and technical support. Thirty employees in total
were terminated. Employees were notified as of September 28, 2001 that their
positions had been eliminated.

During the month of October, the Company decided that further restructuring was
required. During November 2001, a third restructuring plan was announced. The
Company decided to make changes to the engineering department, as well as cut
expenses further in light of the events of September 11 and the effects that
this event had on the sales of its products. The Company announced that it would
be outsourcing the entire production and assembly work in Charlottesville.
During November 2001, it was announced that the Company would eliminate more
than 75 positions between November 2001 and April 2002 as it executes this exit
from manufacturing.

As of December 31, 2000, the Company accrued severance and related benefits in
the amount of $2.4 million related to the Plan. During 2001, the Company accrued
an additional $0.8 million of severance and related benefits for the September
and November restructurings. During 2001, the Company made cash severance
payments of $2.3 million relating to the 2000 and 2001 restructurings. During
2001, $0.4 million was reduced from the restructuring accrual for employees who
terminated their employment voluntarily before their severance date and,
therefore, received no severance pay. As of December 31, 2001, the Company has a
remaining obligation of $0.5 million related to severance and related benefits,
which will be paid during 2002. These amounts are included in accrued payroll
and related expenses in the accompanying December 31, 2001 consolidated
financial statements.


NOTE 16. IMPAIRMENT OF LONG-LIVED ASSETS

During 2001 and 2000, Comdial recorded impairment losses on long-lived assets,
including goodwill, of $3.2 million and $7.4 million, respectively. Asset
impairments for 2001 and 2000 of $1.0 million and $0.3 million, respectively,
were required related to the manufacturing equipment that will be disposed as a
result of the outsourcing of Company's manufacturing operations. The asset
impairments were measured by the excess of the carrying value of the assets over
the fair value of the assets. Fair value of the assets was determined by
independent valuations and quoted market prices. The Company expects to realize
an annual savings of $0.3 million due to the cessation of depreciation on the
assets held for disposal.

                                       59
<PAGE>

Other impairment losses consisted of capitalized software development costs in
the amount of $1.4 million and $0.4 million for 2001 and 2000, respectively,
related to discontinued products. These losses were based on a comparison of the
projected undiscounted cash flows to the carrying value of these assets. In
2000, $3.9 million of software purchased for internal use that was no longer
going to be utilized due to the Company's downsizing was written off.

In March 2000, the Company sold the assets of its wholly owned subsidiary,
Array. Pursuant to the sale of the assets, the Company licensed its technology
to ePHONE. The Company was to receive royalty fees based on certain gross sales
over a five-year period. The Company determined that the present value of the
future cash flows related to the licensing agreement was less than the carrying
value of the goodwill. Accordingly, the Company recorded a $2.8 million
impairment loss on goodwill during 2000. Due to ePHONE filing arbitration
against the Company on October 2, 2001 (see Note 13), Comdial deemed the
remaining goodwill balance of $0.8 million in 2001 to be impaired and recorded a
loss for this amount.

NOTE 17. SUBSEQUENT EVENTS

See Note 6 for subsequent events related to long-term debt.

In the first quarter of 2002, the Company reached agreements with certain
vendors and other creditors to forgive $7.1 million in current non-bank
obligations, net of fees payable to the debt management firm that the Company
hired to assist with these efforts. These liabilities included amounts owed to a
former distributor of the Company's products, several component parts suppliers
and a seller of industrial equipment. The gains on forgiveness of $4.6 million
will be recognized in 2002.

Included in the non-bank obligations reduction is $2.1 million related to a
promissory note that was canceled by a supplier upon Comdial returning the
original inventory purchased from the supplier. Upon return of the inventory,
Comdial entered into a purchase commitment with the supplier to repurchase the
inventory by January 2007, with a minimum monthly purchase amount of $25,000.
Also included in the non-bank obligations reduction is $0.5 million related to a
supplier canceling the amount owed by Comdial in exchange for a purchase
commitment of $0.8 million for product that Comdial must purchase by December
2002.

ITEM 9.  CHANGES IN ACCOUNTANTS

On April 24, 2001, the Registrant dismissed Deloitte & Touche LLP as its
independent auditors.

The reports of Deloitte & Touche LLP on the financial statements for the past
two years did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or accounting
principles.

Furthermore, except for the two matters reported below, during the two most
recent fiscal years and the subsequent interim period, there were no
disagreements with Deloitte & Touche LLP on matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure that,
if not resolved to their satisfaction, would have caused Deloitte & Touche LLP
to make reference to the subject matter of the disagreement(s) in their report.

                                       60
<PAGE>

In connection with the audit of the Registrant's consolidated financial
statements for the year ended December 31, 2000, there was a disagreement
between management and Deloitte & Touche LLP related to the accounting for its
1992 Incentive Stock Option Plan ("the 1992 Plan"). Management recorded
adjustments related to this plan in the 2000 consolidated financial statements
and also restated the 1998 and 1999 consolidated financial statements, as
described in its Annual Report on Form 10-K for 2000 and, as a result, Deloitte
& Touche LLP indicated that this disagreement was satisfactorily resolved.

Also in connection with the audit of the Registrant's consolidated financial
statements for the year ended December 31, 2000, there was a disagreement
related to the accounting for income taxes in 2000. Management recorded
adjustments related to this matter in the 2000 consolidated financial statements
and, as a result, Deloitte & Touche LLP indicated that this disagreement was
satisfactorily resolved.

The Audit Committee of the Company's Board of Directors discussed the subject
matter of both disagreements with Deloitte & Touche LLP.

On May 1, 2001, the Registrant engaged Ernst & Young LLP as its independent
auditors. The Company has authorized Deloitte & Touche LLP to respond fully to
the inquiries of Ernst & Young, LLP concerning the subject matter of the
foregoing disagreements. The decision to change auditors was approved by the
Registrant's Board of Directors on April 23, 2001.

                                       61
<PAGE>

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors and Executive Officers of the Registrant is
incorporated by reference under the caption "Election of Directors" and
"Executive Officers of Comdial" of Comdial's definitive proxy statement for the
annual meeting of stockholders.

ITEM 11.  EXECUTIVE COMPENSATION
Executive compensation and management transactions information is incorporated
by reference under the caption "Executive Compensation" of Comdial's definitive
proxy statement for the annual meeting of stockholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information is incorporated by reference under the captions "Securities
Ownership of Certain Beneficial Owners and Management" of Comdial's definitive
proxy statement for the annual meeting of stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is incorporated by reference under the caption "Family
Relationships" and "Certain Relationships and Related Transactions" of Comdial's
definitive proxy statement for the annual meeting of stockholders.

                                       62
<PAGE>

Part IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)
1.    Audited Consolidated Financial Statements of Comdial Corporation and its
        Subsidiaries

            Report of Ernst & Young LLP
            Report of Deloitte & Touche LLP

            Financial Statements:
            Consolidated Balance Sheets -
              December 31, 2001 and 2000
            Consolidated Statements of Operations -
              Years ended December 31, 2001, 2000
              and 1999
            Consolidated Statements of Stockholders' Equity (Deficit) -
              Years ended December 31, 2001, 2000
              and 1999
            Consolidated Statements of Cash Flows -
              Years ended  December 31, 2001, 2000
              and 1999
            Notes to Consolidated Financial Statements -
              Years ended December 31, 2001, 2000 and 1999


2.    Financial Statements - Supplemental Schedules:

        Schedule II - Valuation and Qualifying Accounts

        All other schedules are omitted because they are not applicable, not
        required, or because the required information is included in the
        consolidated financial statements or notes.

3.    Exhibits Included herein:

        (3)  Articles of Incorporation and Bylaws:

           3.1    Certificate of Incorporation of Comdial Corporation. (Exhibits
                  (a) Item 3.1 to Item 6 of Registrant's Form 10-Q for the
                  period ended July 2, 1995.) *

           3.2    Certificate of Amendment of the Certificate of Incorporation
                  of Comdial Corporation as filed with the Secretary of State of
                  the State of Delaware on February 1, 1994. (Exhibit 3.2 to
                  Registrant's Form 10-Q for the period ended July 2, 1995.)*

           3.3    Bylaws of Comdial Corporation. (Exhibit 3.3 to Registrant's
                  Form 10-K for the year ended December 31, 1993.)*

       (10)  Material Contracts:

          10.1    Registrant's 1992 Stock Incentive Plan and 1992 Non-employee
                  Directors Stock Incentive Plan. (Exhibits 28.1 and 28.2 of
                  Registrant's Form S-8 dated October 21, 1992.)*

          10.2    Amendment No. 1 to the Registrant's 1992 Stock Incentive Plan
                  and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit
                  10.1 and 10.2 of Registrant's Form 10-Q dated September 28,
                  1997.)*

          10.3    Amendment No. 2 to the Registrant's 1992 Stock Incentive Plan
                  and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit
                  10.2 of Registrant's Form 10-Q dated June 30, 1996.)*

          10.4    Amendment No. 3 to the Registrant's 1992 Stock Incentive Plan
                  and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit
                  10.3 of Registrant's Form 10-Q dated June 30, 1996.)*

          10.5    Amendment to Amendment No. 3 to the Registrant's 1992 Non-
                  employee Directors Stock Incentive Plan. (Exhibit 10.5 to
                  Registrant's Form 10-K for the year ended December 31, 1997.)*

          10.6    Amendment No. 4 to the Registrant's 1992 Stock Incentive Plan.
                  (Exhibit 10.6 to Registrant's Form 10-K for the year ended
                  December 31, 1997.)*

          10.7    Amendment No. 4 to the Registrant's 1992 Non-employee
                  Directors Stock Incentive Plan. (Exhibit 10.7 to Registrant's
                  Form 10-K for the year ended December 31, 1997.)*

                                       63
<PAGE>

          10.8    The Registrant's Executive Stock Ownership Plan effective
                  January 1, 1996. (Exhibit 10.10 to Registrant's Form 10-K for
                  the year ended December 31, 1995.)*


          10.9    Amendment No. 1 to the Registrant's Executive Stock Ownership
                  Plan dated July 31, 1997. (Exhibit 10.17 to Registrant's Form
                  10-K for the year ended December 31,

         10.10    Amendment No. 2 to the Registrant's Executive Stock Ownership
                  Plan dated January 1, 1998. (Exhibit 10.18 to Registrant's
                  Form 10-K for the year ended December 31, 1997.)*

         10.11    The Registrant's Executive Severance Plan dated August 31,
                  1995. (Exhibit 10.11 to Registrant's Form 10-K for the year
                  ended December 31, 1995.)*

         10.12    Amendment No. 1 to the Registrant's Executive Severance Plan
                  dated July 31, 1997. (Exhibit 10.19 to Registrant's Form 10-K
                  for the year ended December 31, 1997.)*

         10.13    Development and Purchase Agreement dated February 21, 1997
                  among Registrant and Harris Corporation. (Exhibit 10.20 to
                  Registrant's Form 10-K for the year ended December 31, 1997.)*

         10.14    FastCall Purchase Agreement dated December 31, 1997 among
                  Aurora Systems, Inc. and Spanlink Communications, Inc.
                  (Exhibit 10.21 to Registrant's Form 10-K for the year ended
                  December 31, 1997.)*

         10.15    Asset Purchase Agreement dated July 14, 1998 among the
                  Registrant and Array Telecom Inc. and Array Systems Computing
                  Inc. (Exhibit 10.2 to Registrant's Form 10-Q for the quarter
                  ended June 28, 1998.)*

         10.16    Second Amendment to Comdial's 401(k) Plan dated November 29,
                  1998. (Exhibit 10.25 to Registrant's Form 10-K for the year
                  ended December 31, 1998.)*

         10.17    Third Amendment to Comdial's 401(k) Plan dated February 8,
                  1999.(Exhibit 10.17 to Registrant's Form 10-K for the year
                  ended December 31, 1999)*

         10.18    Credit Agreement dated October 22, 1998 among Registrant and
                  NationsBank, N.A. (Exhibit 10.26 to Registrant's Form 10-K for
                  the year ended December 31, 1998.)*

         10.19    Comdial's Retirement Benefit Restoration Plan (Exhibit 10.19
                  to Registrant's Form 10-K for the year ended December 31,
                  1999)*

         10.20    Strategic Alliance Agreement dated March 31, 2000 between the
                  Registrant and ePHONE Telecom, Inc. (Exhibit 10.1 to
                  Registrant's Form 10-Q for the quarter ended April 2, 2000)*

         10.21    Patent License Agreement dated March 17, 2000 between the
                  Registrant and Lucent Technologies GRL Corporation (Exhibit
                  10.2 to Registrant's Form 10-Q for the quarter ended April 2,
                  2000)*

         10.22    Amendment No. 5 to the Registrant's 1992 Stock Incentive Plan
                  (Exhibit 99.1 to Registrant's Form S-8 dated November 15,
                  2000)*

         10.23    Amended and Restated Credit Agreement dated November 22, 2000
                  (Exhibit 10.23 to Registrant's Form 10-K for the year ended
                  December 31, 2000.)*



         10.24    Agreement of Sale and Purchase dated March 9, 2001 between the
                  Registrant and Seminole Trail Properties, LLC (Exhibit 3.1 to
                  Registrant's Form 8-K filed March 26, 2001)*

         10.25    Deed of Lease dated March 9, 2001 between Seminole Trail
                  Properties, LLC and the Registrant (Exhibit 10.1 to
                  Registrant's Form 8-K filed March 26, 2001)*

         10.26    Amended and Restated Credit Agreement dated April 10, 2001
                  (Exhibit 10.23 to Registrant's Form 10-K for the year ended
                  December 31, 2000.)*

         10.27    First Amendment to Amended and Restated Credit Agreement dated
                  March 6, 2002 between the Registrant and Bank of America, N.A.

         10.28    Certificate of Designation of Series B Alternate Rate
                  Cumulative Convertible Redeemable Preferred Stock dated
                  March 6, 2002


                                       64
<PAGE>

         10.29    Registration Rights Agreement dated March 6, 2002 between the
                  Registrant and Bank of America, N.A.

         10.30    Preferred Stock Investment Agreement dated March 6, 2002
                  between the Registrant and Bank of America, N.A.

* INCORPORATED BY REFERENCE HEREIN.

     (21)  Subsidiaries of the Registrant

     (23)  Consent of Ernst and Young LLP
           Consent of Deloitte & Touche LLP

     (24)  Power of Attorney


(b)  Reports on Form 8-K:

  During the quarter ended December 31, 2001, Comdial filed no current reports
on Form 8-K.

                                       65
<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 29th day of March,
2002.

                                                 COMDIAL CORPORATION

                                                   By: /s/ Paul K. Suijk
                                                  ------------------------------
                                                   Paul K. Suijk
                                                   Senior Vice President and
                                                   Chief Financial Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature                            Title                    Date
---------                            -----                    ----

        *                          Director               March 29, 2002
--------------------
Robert P. Collins


        *                          Director               March 29, 2002
--------------------
Nickolas A. Branica


        *                          Director               March 29, 2002
--------------------
David P. Berg

        *                          Director               March 29, 2002
--------------------
Sanford Schlitt


* By: /s/ Ralph R. Dyer
      -----------------
  Ralph R. Dyer, as attorney
  in fact pursuant to the power
  of attorney contained in
  Exhibit 24 of this Form 10-K.

                                       66
<PAGE>

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COMDIAL CORPORATION
DECEMBER 31, 2001
In Thousands
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
COL. A                                        COL. B              COL. C              COL. D       COL. E
----------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>           <C>            <C>         <C>
Description                                                      Additions
                                            Balance at          Charged to          Charged to                    Balance
                                            Beginning           Costs and             Other                        at End
                                            of Period            Expense             Accounts      Deductions     of Period
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001:

Deducted from asset accounts:
Allowance for doubtful accounts              $ 2,834           $    2,288                           ($1,589)*        $    3,533
Reserve for sales returns                      2,447                   -                            ( 2,224)**              223
Reserve for inventory obsolescence             5,355                2,475                           ( 3,808)***           4,022
Deferred tax asset valuation allowance        34,141                8,277                                 -              42,418
                                            --------           ----------                        ----------          ----------
                    Total                   $ 44,777           $   13,040                           ($7,621)         $   50,196
                                            ========           ==========                        ==========          ==========
Year Ended December 31, 2000:

Deducted from asset accounts:
Allowance for doubtful accounts              $   302            $   2,793                             ($261)*        $    2,834
Reserve for sales returns                        418                2,029                                 -               2,447
 Reserve for inventory obsolescence            3,239                3,734                            (1,618)***           5,355
 Deferred tax asset valuation allowance          300               33,841                                 -              34,141
                                             -------             --------                        ----------          ----------
                      Total                  $ 4,259             $ 42,397                           ($1,879)         $   44,777
                                             =======             ========                        ==========          ==========

Year Ended December 31, 1999:

Deducted from asset accounts:
Allowance for doubtful accounts              $   198             $    194                              ($90)*        $      302
Reserve for sales returns                        401                   17                                 -                 418
Reserve for inventory obsolescence             3,362                  487                              (610)***           3,239
Deferred tax asset valuation allowance         2,966               (2,666)                                -                 300
                                             -------             --------                        ----------          ----------
                    Total                    $ 6,927              ($1,968)                            ($700)         $    4,259
                                             =======             ========                        ==========          ==========
</TABLE>
*    Write off uncollectible accounts
**   Return of inventory
***  Write off obsolete inventory

                                       67