EXHIBIT 13

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

The following  discussion is intended to assist the reader in understanding  and
evaluating  the  financial  condition  and  results  of  operations  of  Comdial
Corporation and its subsidiaries (the "Company").  This review should be read in
conjunction with the financial  statements and accompanying notes. This analysis
attempts to identify  trends and  material  changes  which  occurred  during the
periods  presented.  Prior years have been  reclassified  to conform to the 1996
reporting basis (see Note 1 to the Consolidated Financial Statements).

RESULTS OF OPERATIONS

Selected  consolidated  statements of operations for the last three years are as
follows:
<TABLE>
<CAPTION>
<S> <C>
----------------------------------------------------------------------------------------------------------
December 31,
 In thousands                                                      1996             1995              1994
----------------------------------------------------------------------------------------------------------
    Net sales                                                  $102,229          $94,802           $77,145
    Gross profit                                                 37,818           30,775            24,727
    Selling, general & administrative                            25,694           19,298            15,161
    Engineering, research & development                           5,771            4,186             3,932
    Interest expense                                              1,626              996             1,267
    Goodwill amortization                                         2,674               23                23
    Miscellaneous expense - net                                     762              737               614
    Income tax expense/(benefit)                                   (518)          (4,334)              116
    Extraordinary item, write-off
       of debt issuance cost                                          -                -               389
    Net income                                                    1,809            9,869             3,225
    Dividends on preferred stock                                      -              350               577
    Net income applicable to common stock                         1,809            9,519             2,648
----------------------------------------------------------------------------------------------------------
</TABLE>

1996 Compared with 1995

Net sales as reported for 1996  increased by 8% to  $102,229,000,  compared with
$94,802,000  in 1995.  The continued  increase in net sales was primarily due to
(1) continued  demand for the Company's  Digital  Expandable  System ("DXP") and
Impact  products,  and (2)  continued  growth  in  sales of  Computer  Telephony
Integration  ("CTI")  products which was enhanced by the  acquisitions of Aurora
Systems,  Inc.  ("Aurora") and Key Voice  Technologies,  Inc. ("KVT").  In 1996,
sales of DXP products increased 29% to $17,570,000 compared with $13,619,000 for
1995. In 1996, sales of CTI products, including voice processing, increased 180%
to $20,250,000  compared with $7,223,000 for 1995.  Management  expects sales of
digital business systems and CTI products to continue to grow in 1997, primarily
due to (1) continued growth in DXP system sales driven by new CTI  applications,
(2)  development  of new  products,  (3)  sales by newly  acquired  wholly-owned
subsidiaries  Aurora and KVT which should help increase the sales of CTI related
products,  and (4) acceptance of DXP and CTI products in international  markets.
In  1996,  sales  of  analog  products,   proprietary   terminals,   and  custom
manufacturing revenue decreased 27% to $16,041,000,  21% to $4,693,000,  and 79%
to  $1,299,000,   respectively,  compared  with  $22,076,000,   $5,938,000,  and
$6,092,000,  respectively,  for 1995.  The  custom  manufacturing  decrease  was
primarily  due to  completion  in  1995  of a  one-time  contract  with a  major
customer.  Management  expects  sales of analog  and  proprietary  terminals  to
continue to decrease in 1997. In 1996,  international  sales increased by 38% to
$3,670,000  compared with  $2,666,000 for 1995.  International  sales were lower
than projected  primarily due to unstable  economic  conditions in Latin America
and other foreign  countries.  As the Company's products gain more international
exposure,   and  the   Company   recruits   more   international   distributors,
international sales are expected to grow.

Gross profit as a percentage  of sales for 1996 was  approximately  37% compared
with 32% for  1995.  In  1996,  gross  profit  increased  by 23% to  $37,818,000
compared with $30,775,000 for 1995. This increase was primarily  attributable to
increased sales of higher margin business system  products,  such as DXP and CTI
products, and higher margins that Aurora and KVT products added to the business.

Selling,  general  and  administrative  expenses  increased  in  1996  by 33% to
$25,694,000  compared with  $19,298,000  for 1995.  The primary  reasons for the
increase were (1) an increase in sales personnel to broaden our domestic network
and to support the growth of the CTI and international  markets,  (2) additional
administrative,  marketing,  and sales  expenses of $2,940,000  associated  with
Aurora and KVT,  and (3) higher  promotional  allowance  costs  associated  with
increased sales through Preferred Dealers.

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

Interest expense  increased in 1996 by 63% to $1,626,000  compared with $996,000
for 1995.  This increase was due to the  acquisition  loan the Company  obtained
from Fleet  Capital  Corporation  ("Fleet")  to provide  funding to help acquire
Aurora and KVT.  Additional  interest expense was also incurred as a result of a
promissory  note issued to the  original  owners of KVT as part of the  purchase
price of KVT (see Note 2 to the Consolidated Financial Statements).

Goodwill  amortization  expense in 1996  increased to  $2,674,000  compared with
$23,000 in 1995. The increase was due to the acquisitions of Aurora and KVT (see
Note 2 to the Consolidated Financial Statements).

Net income before income taxes,  as a result of the foregoing,  decreased 77% to
$1,291,000 in 1996,  compared with $5,535,000 in 1995. Some of the factors which
led to the  decreases  in  income  and  earnings  per  share  for 1996  were (1)
decreased  sales of analog  products which were down by  approximately  27%, (2)
decreased sales to the Federal  Government which were down by approximately 53%,
and (3) additional  costs  associated  with expanding the sales and  engineering
organizations.  Management  anticipates,  assuming  continued  strength  in  the
economy,  that the factors which have led to significant  increases in sales for
the  second  half of 1996 will  continue  to have a  positive  influence  on the
Company's performance in 1997. The Company plans to continue to improve sales by
(1) introducing new products, product enhancements,  and additional applications
of DXP, Impact,  digital, and CTI products,  (2) increasing sales through Aurora
and KVT, (3)  increasing  international  sales by  introducing  new products and
recruiting new distributors, and (4)expanding distribution in the U.S.

Income tax expense  (benefit)  reflects a benefit of  $518,000 in 1996  compared
with a benefit of $4,334,000  for 1995.  This change was due to recognition of a
deferred tax asset through a reduction of the valuation  allowance for both 1996
and 1995.  The Company  periodically  reviews the  requirements  for a valuation
allowance and makes  adjustments to such allowance when changes in circumstances
result in changes in  judgment  about the future  realization  of  deferred  tax
assets.  Based on a continual  re-evaluation  of the realization of the deferred
tax asset, the valuation allowance was reduced and a tax benefit of $736,000 was
recognized in the quarter ended March 31, 1996.

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

1995 Compared with 1994

Net sales as reported for 1995  increased by 23% to  $94,802,000,  compared with
$77,145,000  in 1994.  The continued  increase in sales was primarily due to (1)
demand for the Company's DXP and Impact products,  and (2) improved sales of CTI
products.  In 1995, sales of digital products (DXP and digital) increased 43% to
$53,473,000  compared with  $37,315,000 for 1994. In 1995, sales of CTI products
increased 20% to $7,223,000  compared with $5,996,000 for 1994. In 1995,  custom
manufacturing  increased to $6,092,000  compared with  $2,578,000  for 1994 as a
result of a one-time  contract from a major customer.  In 1995,  sales of analog
and  proprietary  terminals  decreased 10% to $22,076,000  and 10% to $5,938,000
compared  with  $24,654,000  and  $6,602,000,  respectively,  for 1994. In 1995,
international  sales increased by 7% to $2,666,000  compared with $2,482,000 for
1994.

Gross profit as a percentage of sales for 1995 was approximately  32.5% compared
with 32.1% for 1994.  In 1995,  gross  profit  increased  by 24% to  $30,775,000
compared with $24,727,000 for 1994. These increases were primarily  attributable
to increased sales of higher margin business  system  products,  such as DXP and
Impact products.

Selling,  general  and  administrative  expenses  increased  in  1995  by 27% to
$19,298,000  compared with  $15,161,000  for 1994.  The primary  reasons for the
increase were (1) higher  promotional  allowance costs associated with increased
sales  volume and an  increased  number of  dealers,  (2) an  increase  in sales
personnel to support the growth of the CTI and international markets, and (3) an
increase in advertising due to the emphasis on market  recognition.  Advertising
expenses as a percentage of net sales were  approximately  20% for both 1995 and
1994. The Company formed Comdial  Enterprise  Systems,  Inc.  ("CES") in 1993 to
manage the  Company's CTI  business.  Costs  relating to CES increased by 55% to
$1,255,000 compared with $811,000 in 1994, due largely to additional personnel.

Engineering,  research  and  development  expenses  increased  in  1995 by 6% to
$4,186,000 compared with $3,932,000 for 1994. This increase was primarily due to
an increase in software development and support personnel.

Interest expense  decreased in 1995 by 21% to $996,000  compared with $1,267,000
for 1994.  This decrease was  primarily  due to (1)  continued  reduction of the
Company's  indebtedness,  and (2) the  Company's  ability to  generate  funds to
minimize its use of the revolving credit facility with Fleet.

Miscellaneous  expense -net increased by 20% to $737,000 in 1995,  compared with
$614,000 in 1994.  This increase was primarily due to cash discounts  associated
with the increased sales in 1995.

Net  income  before  income  taxes and  extraordinary  item,  as a result of the
foregoing,  increased  48% to $5,535,000  in 1995,  compared with  $3,730,000 in
1994. Net income before income taxes and extraordinary  item also increased as a
percentage of net sales to 6% in 1995 compared with 5% in 1994.

Income tax  expense(benefit)  reflects a benefit of  $4,334,000 in 1995 compared
with an expense of  $116,000  for 1994.  This  change was  primarily  due to the
recognition  of a  deferred  tax asset  through  a  reduction  of the  valuation
allowance. As of July 2, 1995, the valuation allowance was reduced by $4,503,000
based on  management's  assessment  of future  taxable  income and  management's
belief that it is "more  likely than not" that the Company  will realize the tax
benefit.

Extraordinary  item,  write-off of debt issuance cost,  represents debt issuance
costs that were written off during the first quarter of 1994 in connection  with
refinancing the Company's indebtedness to PacifiCorp Credit, Inc.
("PCI").

Dividends on preferred stock for 1995 represent  quarterly  dividends payable to
the holder of the Company's  Series A Preferred  Stock.  The Company  originally
issued  850,000  shares of Series A Preferred  Stock to PCI in February 1994, in
exchange for the  cancellation  of $8,500,000 of the Company's  indebtedness  to
PCI.  In December  1994,  the Company  redeemed  100,000  shares of the Series A
Preferred Stock.

Dividends in 1995 decreased by 39% to $350,000  compared with $577,000 for 1994.
In August 1995, the Company redeemed the remaining  750,000 shares with proceeds
received  from a public  offering  of the  Company's  Common  Stock and paid all
dividends associated with the Series A Preferred Stock.

LIQUIDITY AND CAPITAL SOURCES

As  of  February  1,  1994,  Fleet  held  substantially  all  of  the  Company's
indebtedness.  Prior to  February  1, 1994,  PacifiCorp,  through  its  indirect
subsidiary, PCI, held substantially all of the Company's indebtedness.

The  Company  and  Fleet  entered  into a loan  and  security  agreement  ("Loan
Agreement")  in 1994  pursuant to which Fleet  provided  the Company with a $6.0
million  term loan  represented  by a note  ("Term  Note I") and a $9.0  million
revolving  credit loan facility  ("Revolver") in an aggregate amount up to $14.0
million.  The term loan was used,  along with other  funds,  to repay all of the
Company's  indebtedness to PCI. On April 29, 1994, the Company and Fleet amended
the Loan  Agreement  which  allowed  the  Company to borrow an  additional  $1.3
million  represented by another note ("Term Note II") to finance the purchase of
additional  surface mount technology  equipment.  Term Note II was payable in 44
equal monthly payments of $27,000 with the balance due on February 1, 1998.

The Term Notes and Revolver under the original Loan Agreement  carried  interest
rates of 1.50% and 1.00% over Fleet's  prime rate,  respectively.  Fleet's prime
rate  was  8.25%  and  8.50%  at  December  31,  1996  and  December  31,  1995,
respectively.

On March 13, 1996,  the Company and Fleet amended the Loan  Agreement to provide
the Company with a $10.0 million  acquisition loan ("Acquisition  Loan"), a $3.5
million equipment loan ("Equipment  Loan"), and a $12.5 million revolving credit
loan facility ("Amended  Revolver").  The remaining balances on Term Notes I and
II  were  paid by  advances  from  the  Amended  Revolver  and  Equipment  Loan,
respectively (see Note 6 to Consolidated  Financial  Statements).  The Equipment
Loan is payable in equal monthly  principal  installments  of $27,000,  with the
balance due on June 1, 1998.

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

Availability under the Amended Revolver is based on eligible accounts receivable
and inventory, less funds already borrowed. As of December 31, 1996, the Company
had  borrowed  funds  totaling  $1,749,000  under the Amended  Revolver  and had
approximately  $8,031,000 of borrowing capacity. The Company expects to fund its
1997  total debt  payments  of  $3,779,000  to Fleet  with cash  generated  from
operations.

The  Acquisition  Loan,  Equipment  Loan, and Amended  Revolver bear interest at
rates based on either  Fleet's prime rate or the London  Interbank  Offered Rate
("LIBOR").  The interest  rates may be adjusted  annually based on the Company's
debt to earnings  ratio.  Depending on the ratio,  the interest  rates vary from
minus  0.50% to plus  0.50%  under or above the Fleet  prime  rate and from plus
1.50% to 2.50% above LIBOR. As of December 31, 1996, the prime interest rate was
8.25% and LIBOR  rate was 5.66%  with  approximately  79% of the loans  based on
LIBOR. As of December 31, 1996, the Company's borrowing rates for loans based on
the prime and LIBOR rates were 8.25% and 7.66%, respectively.

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

On  September  27,  1996,  the Company and Fleet  amended the Loan  Agreement to
modify certain covenants.

The Company's  indebtedness  under the Loan Agreement is secured by liens on the
Company's accounts  receivable,  inventories,  intangibles,  land, and all other
assets.  The Loan  Agreement  also contains  financial  covenants  requiring the
Company  to  maintain  specified  levels of  consolidated  tangible  net  worth,
profitability,  debt  service  ratio,  and  current  ratio  (see  Note  6 to the
Consolidated Financial  Statements).  In addition, the Loan Agreement limits the
Company's  ability to make additional  borrowings and payment of dividends.  The
Company was in  compliance  with all the covenants and terms of the amended Loan
Agreement as of December 31, 1996.

In addition to the Fleet  indebtedness,  the Company  issued a  promissory  note
("Promissory Note") in the principal amount of $7.0 million to the former owners
of KVT,  which was part of the  purchase  price  for KVT.  The  Promissory  Note
carries an  interest  rate based on prime with yearly  payments of $1.4  million
over five years starting on March 20, 1997.

Capital leases with various financing entities are payable based on the terms of
each  individual  lease.  Other debt consists of a mortgage that was acquired as
part of the KVT acquisition which has a monthly payment of $2,817 and carries an
interest rate of 8.75%. The final payment under the mortgage is due on August 1,
2005.

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

--------------------------------------------------------------------------------
December 31,
In thousands                              1996             1995             1994
--------------------------------------------------------------------------------
     Cash and cash equivalents            $180           $4,144           $1,679
     Current maturities on debt          5,343            1,903            2,466
     Working capital                    10,608           18,271           11,631
--------------------------------------------------------------------------------

All operating cash  requirements  are currently being funded through the Amended
Revolver.  Cash and cash  equivalents are lower by $3,964,000 as of December 31,
1996 compared with 1995,  primarily due to the  acquisitions  of Aurora and KVT.
All available cash was used to help fund the acquisitions. Current maturities on
debt at December 31, 1996, increased by $3,440,000, primarily due to an increase
in the Amended  Revolver of $1,749,000  and an increase of $1,400,000  due under
the  Promissory  Note.  Working  capital at  December  31,  1996,  decreased  by
$7,663,000 when compared to 1995. This decrease was primarily due to the Company
drawing down its cash surplus and borrowing  additional  funds to acquire Aurora
and KVT which occurred at the beginning of 1996.

The  Company  considers  outstanding  checks to be a bank  overdraft.  Under the
Company's current cash management  policy,  receipts are deposited directly into
the Amended Revolver account to reduce the revolving credit balance.
 Operations  are funded by  borrowing  under the Amended  revolver.  The Company
reports  the  revolving  credit  facility   activity  on  a  net  basis  on  the
Consolidated Statements of Cash Flows.

Assets,  liabilities,  and stockholders'  equity at December 1996,  increased by
$3,232,000, $1,907,000, and $1,325,000,  respectively,  primarily due to amounts
related to the  acquisitions  of Aurora and KVT (see Note 2 to the  Consolidated
Financial Statements).

Prepaid  expenses  and other  current  assets at  December  1996,  decreased  by
$1,354,000  compared  with December  1995.  This decrease was primarily due to a
miscellaneous  receivable  for  returned  inventory  that  related  to a  custom
manufacturing project that had been completed by the end of 1995.

Goodwill at December 1996, increased by $16,642,000 compared with December 1995.
This increase was due to the acquisitions of Aurora and KVT. The purchase price,
including acquisition costs for both companies,  exceeded net assets acquired by
approximately  $19,316,000.  This excess is amortized on a  straight-line  basis
over  one to  eight  years  based  on  asset  valuations  performed  by  outside
consultants.  The amount amortized since the acquisitions by the Company for the
year ended 1996 was $2,651,000.

Other assets at December  1996,  increased by $1,842,000  compared with December
1995.  This  increase was  primarily  due to costs  associated  with new product
development by outside consultants,  capitalized software development costs, and
the addition of Aurora and KVT assets.

Accrued  payroll and related  expenses at December  1996,  increased by $912,000
compared with  December  1995.  This  increase was primarily due to  liabilities
relating to Aurora and KVT.

Capital additions for 1996 were approximately $3,416,000. Such capital additions
helped the Company  introduce new products as well as improve quality and reduce
costs associated with new and existing products. Capital additions were provided
by funding from  operations,  capital  leasing,  and borrowing from Fleet.  Cash
expenditures  for  capital  additions  for  1996,  1995,  and 1994  amounted  to
$3,179,000,  $2,155,000,  and $2,116,000,  respectively.  Management anticipates
that  approximately  $4,000,000 will be spent on capital  additions during 1997.
These  additions will help the Company meet its  commitments to its customers by
developing new products for the future.  The Company plans to fund all additions
through operations, borrowing, and long-term leases.

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

The Company has a  commitment  from  Crestar Bank for the issuance of letters of
credit in an  aggregate  amount  not to  exceed  $500,000  at any one  time.  At
December  31,  1996,  the amount of  available  commitments  under the letter of
credit facility with Crestar Bank was $116,000.

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

During fiscal years 1996, 1995, and 1994,  primarily all of the Company's sales,
net   income,   and   identifiable   net  assets   were   attributable   to  the
telecommunications industry.

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

The Company's Annual Report may contain some forward-looking statements that are
subject to risks and uncertainties, including, but not limited to, the impact of
competitive  products,  product demand and market acceptance risks,  reliance on
key  strategic   alliances,   fluctuations  in  operating  results,   delays  in
development  of highly complex  products,  and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission. These
risks could  cause the  Company's  actual  results for 1997 and beyond to differ
materially from those expressed in any forward-looking  statement made by, or on
behalf of, the Company.





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



Board of Directors and Stockholders
Comdial Corporation
Charlottesville, Virginia


We  have  audited  the  accompanying  consolidated  balance  sheets  of  Comdial
Corporation and its subsidiaries (the Company) as of December 31, 1996 and 1995,
and the related consolidated statements of operations,  stockholders' equity and
cash flows for each of the three years in the period  ended  December  31, 1996.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material   respects,   the  financial   position  of  Comdial   Corporation  and
subsidiaries at December 31, 1996 and 1995, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1996 in conformity with generally accepted accounting principles.



/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
January 30, 1997




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

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

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

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

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


/s/ William G. Mustain                                 /s/ Wayne R. Wilver
William G. Mustain                                     Wayne R. Wilver
Chairman, President and                                Senior Vice President and
Chief Executive Officer                                Chief Financial Officer



<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets
--------------------------------------------------------------------------------- --------------------------------
                                                                                                December 31,
In thousands except par value                                                               1996            1995
------------------------------------------------------------------------------------------------------------------

Assets
    Current assets
      Cash and cash equivalents                                                              $180          $4,144
      Accounts receivable - net                                                             9,660           8,976
      Inventories                                                                          19,586          17,925
      Prepaid expenses and other current assets                                             1,341           2,695
------------------------------------------------------------------------------------------------------------------
         Total current assets                                                              30,767          33,740
------------------------------------------------------------------------------------------------------------------

    Property - net                                                                         15,317          13,943
    Net deferred tax asset                                                                  7,469           6,694
    Goodwill                                                                               16,852             210
    Other assets                                                                            3,947           2,105
------------------------------------------------------------------------------------------------------------------
         Total assets                                                                     $74,352         $56,692
==================================================================================================================

Liabilities and Stockholders' Equity
    Current liabilities
      Accounts payable                                                                     $8,144          $7,988
      Accrued payroll and related expenses                                                  2,926           2,014
      Accrued promotional allowances                                                        1,903           1,851
      Other accrued liabilities                                                             1,843           1,713
      Current maturities of debt                                                            5,343           1,903
------------------------------------------------------------------------------------------------------------------
         Total current liabilities                                                         20,159          15,469
------------------------------------------------------------------------------------------------------------------

    Long-term debt                                                                         11,713           2,844
    Net deferred tax liability                                                              2,230           2,191
    Long-term employee benefit obligations                                                  1,686           1,894
    Commitments and contingent liabilities (see Note 13)                                        -               -
------------------------------------------------------------------------------------------------------------------
         Total liabilities                                                                 35,788          22,398
------------------------------------------------------------------------------------------------------------------

    Stockholders' equity
      Common stock ($0.01 par value) and paid-in capital
         (Authorized 30,000 shares; issued shares:
          1996 = 8,580; 1995 = 8,132)                                                     114,118         111,625
      Other                                                                                (1,046)         (1,014)
      Accumulated deficit                                                                 (74,508)        (76,317)
------------------------------------------------------------------------------------------------------------------
         Total stockholders' equity                                                        38,564          34,294
------------------------------------------------------------------------------------------------------------------
         Total liabilities and stockholders' equity                                       $74,352         $56,692
==================================================================================================================

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

<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Operations

----------------------------------------------------------------------------------------------------------------
                                                                                 Years Ended December 31,
In thousands except per share amounts                                        1996           1995          1994
----------------------------------------------------------------------------------------------------------------


Net sales                                                                  $102,229       $94,802       $77,145
Cost of goods sold                                                           64,411        64,027        52,418
----------------------------------------------------------------------------------------------------------------
        Gross profit                                                         37,818        30,775        24,727
----------------------------------------------------------------------------------------------------------------

Operating expenses
    Selling, general & administrative                                        25,694        19,298        15,161
    Engineering, research & development                                       5,771         4,186         3,932
----------------------------------------------------------------------------------------------------------------
        Operating income                                                      6,353         7,291         5,634
----------------------------------------------------------------------------------------------------------------

Other expense
    Interest expense                                                          1,626           996         1,267
    Goodwill amortization                                                     2,674            23            23
    Miscellaneous expense - net                                                 762           737           614
----------------------------------------------------------------------------------------------------------------
Income before income taxes and                                                1,291         5,535         3,730
    extraordinary item
Income tax expense/(benefit)                                                   (518)       (4,334)          116
----------------------------------------------------------------------------------------------------------------
Income before extraordinary item                                              1,809         9,869         3,614
Extraordinary item, write-off of
    debt issuance cost                                                            -             -           389
----------------------------------------------------------------------------------------------------------------
        Net income                                                            1,809         9,869         3,225
Dividends on preferred stock                                                      -           350           577
----------------------------------------------------------------------------------------------------------------
        Net income applicable to common stock                                $1,809        $9,519        $2,648
================================================================================================================

Earnings (loss) per common share and common
    equivalent share:
        Earnings per common share                                             $0.21             -             -
================================================================================================================
        Primary:
          Income before extraordinary item                                        -         $1.24         $0.42
          Extraordinary item                                                      -             -         (0.05)
----------------------------------------------------------------------------------------------------------------
            Net income per common share                                           -         $1.24         $0.37
================================================================================================================

        Fully diluted                                                             -         $1.20         $0.37
================================================================================================================

Weighted average common shares outstanding:
        Weighted average per common share                                     8,479             -             -
        Primary                                                                   -         7,697         7,235
        Fully diluted                                                             -         8,226         7,235

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



<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
<S> <C>
------------------------------------------------------------------------------------------------------------------


                                                  Common Stock             Preferred Stock          
                                           -----------------------------------------------------         Paid-in
In thousands                                       Shares       Amount     Shares        Amount          Capital
------------------------------------------------------------------------------------------------------------------
 Balance at January 1, 1994                        20,728         $207          -            $-          $99,840
     Proceeds from sale of
        Common Stock:
        Notes receivable                                                                                    (146)
        Stock options exercised                       439            4                                       285
     Incentive stock issued                            40                                                    130
     Preferred stock issued                                                   850         8,500
     Redeemed preferred stock                                                (100)       (1,000)
     Treasury stock purchased
     Dividend paid on preferred stock
 Net income
------------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1994                      21,207          211        750         7,500          100,109
     Reverse stock-split 1 for 3
         (August 8, 1995)                         (14,138)        (141)                                      141
     Proceeds from sale of
        Common Stock:
        Stock offering                              1,000           10                                    11,200
        Notes receivable
        Stock options exercised                       144            2                                       250
     Stock offering cost                                                                                    (273)
     Incentive stock issued                            13                                                    116
     Redeemed preferred stock                                                (750)       (7,500)
     Treasury stock purchased
     Dividend paid on preferred stock
 Net income
------------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1995                       8,226           82          -             -          111,543
     Proceeds from sale of
        Common Stock:
        Notes receivable
        Stock options exercised                        53            1                                        82
     Stock offering cost                                                                                     (26)
     Incentive stock issued                             8                                                     73
     Treasury stock purchased
     Common stock issued for acquisitions
        Key Voice Tech., Inc.                         243            2                                     1,469
        Aurora Systems, Inc.                          148            2                                       890
 Net income
------------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1996                       8,678          $87          -             -         $114,031
==================================================================================================================
<CAPTION>

                                          -----------------------------------------------------------------------
                                                                     
                                                                          Notes
                                                 Treasury Stock        Receivable
                                            ------------------------     on Sale        Retained
In thousands                                   Shares       Amount      of Stock        Earnings          Total
-----------------------------------------------------------------------------------------------------------------
 Balance at January 1, 1994                     (151)       $(585)       $(229)         $(88,483)        $10,750
     Proceeds from sale of
        Common Stock:
        Notes receivable                                                    47                               (99)
        Stock options exercised                                                                              289
     Incentive stock issued                                                                                  130
     Preferred stock issued                                                                                8,500
     Redeemed preferred stock                                                                             (1,000)
     Treasury stock purchased                   (103)        (175)                                          (175)
     Dividend paid on preferred stock                                                       (577)           (577)
 Net income                                                                                3,225           3,225
-----------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1994                   (254)        (760)        (182)          (85,835)         21,043
     Reverse stock-split 1 for 3
         (August 8, 1995)                        169                                                           -
     Proceeds from sale of
        Common Stock:
        Stock offering                                                                                    11,210
        Notes receivable                                                     6                                 6
        Stock options exercised                                                                              252
     Stock offering cost                                                                                    (273)
     Incentive stock issued                                                                   (1)            115
     Redeemed preferred stock                                                                             (7,500)
     Treasury stock purchased                     (9)         (78)                                           (78)
     Dividend paid on preferred stock                                                       (350)           (350)
 Net income                                                                                9,869           9,869
-----------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1995                    (94)        (838)        (176)          (76,317)         34,294
     Proceeds from sale of
        Common Stock:
        Notes receivable                                                     8                                 8
        Stock options exercised                                                                               83
     Stock offering cost                                                                                     (26)
     Incentive stock issued                                                                                   73
     Treasury stock purchased                     (3)         (40)                                           (40)
     Common stock issued for acquisitions
        Key Voice Tech., Inc.                                                                              1,471
        Aurora Systems, Inc.                                                                                 892
 Net income                                                                                1,809           1,809
-----------------------------------------------------------------------------------------------------------------
 Balance at December 31, 1996                    (97)       $(878)       $(168)         $(74,508)        $38,564
=================================================================================================================


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



<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Cash Flows

----------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Years Ended December 31,
In thousands                                                                              1996              1995            1994
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
    Cash received from customers                                                        $106,979          $97,156         $81,298
    Other cash received                                                                    1,022            1,355           2,305
    Interest received                                                                         53               60              56
    Cash paid to suppliers and employees                                                (101,220)         (93,990)        (75,888)
    Interest paid on debt                                                                   (876)            (676)           (924)
    Interest paid under capital lease obligations                                            (89)            (174)           (284)
    Income taxes paid                                                                       (243)            (186)           (200)
----------------------------------------------------------------------------------------------------------------------------------
       Net cash provided by operating activities                                           5,626            3,545           6,363
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
    Purchase of Key Voice Technologies ("KVT")                                            (8,528)               -               -
    Purchase of Aurora Systems ("Aurora")                                                 (1,901)               -               -
    Acquisition cost for KVT and Aurora                                                     (934)               -               -
    Proceeds from the sale of equipment                                                        9                6             206
    Proceeds received on note from Cortelco
      International, Inc.                                                                      -                -           1,000
    Capital expenditures                                                                  (3,179)          (2,155)         (2,116)
----------------------------------------------------------------------------------------------------------------------------------
       Net cash used by investing activities                                             (14,533)          (2,149)           (910)
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
    Proceeds from borrowings                                                               5,619                -           7,300
    Net borrowings under revolver agreement                                                1,749                -               -
    Proceeds from issuance of common stock                                                    47           11,384             203
    Principal payments on debt                                                            (1,941)          (1,824)        (14,365)
    Principal payments under capital lease obligations                                      (531)            (641)           (809)
    Preferred stock redemption                                                                 -           (7,500)         (1,000)
    Preferred dividends paid                                                                   -             (350)           (577)
----------------------------------------------------------------------------------------------------------------------------------
       Net cash provided (used) by financing activities                                    4,943            1,069          (9,248)
----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                      (3,964)           2,465          (3,795)
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year                                             4,144            1,679           5,474
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                                    $180           $4,144          $1,679
==================================================================================================================================
Reconciliation of net income to net cash provided by operating activities:
 Net Income                                                                               $1,809           $9,869          $3,225
----------------------------------------------------------------------------------------------------------------------------------
    Depreciation and amortization                                                          6,680            3,557           4,138
    Change in assets and liabilities (for 1996,  net
       of effects from the purchase of KVT and Aurora):
    Decrease (increase) in accounts receivable                                               143           (2,339)           (453)
    Inventory provision                                                                    1,029            1,309             964
    Increase in inventory                                                                 (2,385)          (2,365)         (2,989)
    Increase in other assets                                                              (1,888)          (3,277)         (1,620)
    Increase in net deferred tax assets                                                     (736)          (4,503)              -
    Increase (decrease) in accounts payable and
       bank overdrafts                                                                      (657)           1,011           1,918
    Increase in other liabilities                                                            595              435           1,238
    KVT asset value at acquisition                                                         1,105                -               -
    Aurora asset value at acquisition                                                       (121)               -               -
    Increase (decrease) in other equity                                                       52             (152)            (58)
----------------------------------------------------------------------------------------------------------------------------------
       Total adjustments                                                                   3,817           (6,324)          3,138
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                                 $5,626           $3,545          $6,363
==================================================================================================================================

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



Notes to Consolidated Financial Statements
For the Years Ended December 31, 1996, 1995, 1994

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Nature of Operations

Comdial is a United States ("U.S.") based manufacturer of business communication
systems.  The Company's principal customers are small to medium sized businesses
throughout the U.S. and certain international  markets. The distribution network
consists of three major  distributors,  other supply houses,  approximately 1700
dealers,  and several  thousand  independent  interconnects.  The dynamic,  high
technology industry in which the Company participates is very competitive. There
is an  increasing  shift from analog to digital  product  lines as well as other
rapid technological changes creating the potential for product obsolescence. The
Company, at this time, does not perceive an obsolescence problem with respect to
any of its products.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial  statements in conformity  with Generally  Accepted
Accounting Principles ("GAAP") requires management to make certain estimates and
assumptions  that  affect  reported  amounts of assets,  liabilities,  revenues,
expenses,  and disclosure of contingent  assets and  liabilities at December 31,
1996.
Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash  equivalents are defined as short-term  liquid  investments with maturities
when  purchased  of less than 90 days that are  readily  convertible  into cash.
Under  the  Company's  current  cash  management  policy,  borrowings  from  the
revolving credit facility are used for normal operating purposes.  The revolving
credit  facility is reduced by cash  receipts  that are  deposited  daily.  Bank
overdrafts  of $1,935,000  and  $1,594,000  are included in accounts  payable at
December 31, 1996 and 1995, respectively. Bank overdrafts are outstanding checks
that have not (1) cleared the bank and (2) been funded by the  revolving  credit
facility (see Note 6). The Company is reporting the  revolving  credit  facility
activity on a net basis on the Consolidated Statements of Cash Flows.

Inventories

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

Property/Depreciation

Depreciation is computed using the straight-line method for all buildings,  land
improvements, machinery and equipment, and capitalized lease property over their
estimated  useful  lives.  Effective  January 1, 1994,  the Company  revised the
estimated useful lives of certain computer hardware equipment from seven to five
years to more closely reflect  expected  remaining  useful lives.  The effect of
this change in  accounting  estimate  was to increase  depreciation  expense and
decrease  income  from  continuing  operations  in 1994 by $239,000 or $0.03 per
share.  Expenditures  for  maintenance  and repairs of  property  are charged to
expense. Improvements and renewals which extend economic lives are capitalized.

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

Expensing of Costs

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

Earnings per Common Share and Common Equivalent Share

For 1996,  1995,  and 1994,  earnings per common share were computed by dividing
net income  applicable to common shares by the weighted average number of common
shares  outstanding and common  equivalent  shares.  During 1996,  there were no
preferred  stock  dividends  paid or earned,  and stock options and other common
equivalent  shares  were  antidilutive.  For the years  1995 and  1994,  primary
earnings  per share were  computed by  dividing  income  attributable  to common
shareholders  (net income less  preferred  stock dividend  requirements)  by the
weighted  average  number of common and  common  equivalent  shares  outstanding
during the period  plus (in  periods  in which they had a dilutive  effect)  the
effect of common shares  contingently  issuable,  primarily  from stock options.
Fully diluted  earnings per share assumes the conversion of preferred  stock and
adds back the preferred  stock  dividends paid to net income.  The effect of the
preferred stock conversion was antidilutive for the year ended 1994.

Capitalized Software Development Costs

In 1996,  1995, and 1994, the Company incurred costs associated with development
of software related to the Company's various  products.  The accounting for such
software costs is in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86. The Company's  estimate of product life is approximately  three
years or more.  The  total  amount  of  unamortized  software  development  cost
included in other assets is $2,297,000  and  $1,475,000 at December 31, 1996 and
1995,  respectively.  The amounts  capitalized  were $1,577,000,  $840,000,  and
$717,000,  of which  $877,000,  $757,000,  and $858,000 were  amortized in 1996,
1995, and 1994, respectively. The Company also capitalized costs associated with
product software development performed by outside contract engineers.  The total
amount of unamortized outside contract development cost included in other assets
is $988,000 at December 31, 1996.  The amount  capitalized  was  $1,145,000,  of
which $157,000 was amortized in 1996. For the years 1995 and 1994, there were no
capitalized  costs or  amortization  expense  that  related to outside  contract
development cost.

Postretirement Benefits Other Than Pension

SFAS No. 106,  "Employers'  Accounting  for  Postretirement  Benefits Other Than
Pensions" requires the Company to accrue estimated costs relating to health care
and life insurance  benefits.  In 1996,  1995,  and 1994,  the Company  expensed
$41,000, $311,000 and $289,000, respectively.

Income Taxes

In accordance  with SFAS No. 109,  "Accounting for Income Taxes," this statement
specifies the asset and liability approach.  The deferred tax liability or asset
is determined  based on the difference  between the financial  statement and tax
basis of assets and  liabilities as measured by the enacted tax rates which will
be in effect when the differences reverse. Deferred tax expense is the result of
changes in the liability for deferred  taxes.  The  measurement  of deferred tax
assets is reduced by the amount of any tax  benefits  where,  based on available
evidence,  the likelihood of  realization  can be  established.  The Company has
incurred prior cumulative  operating losses through 1991 for financial statement
and tax reporting  purposes and has adjusted its valuation  allowance account to
recognize a portion of the net deferred  tax asset for future  periods (see Note
7). Tax credits will be utilized to reduce current and future income tax expense
and payments.

Accounting for Stock-Based Compensation

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

Reclassifications

Amounts  in the  1995 and  1994  consolidated  financial  statements  have  been
reclassified to conform to the 1996 presentation. These reclassifications had no
effect on previously reported consolidated net income.

NOTE 2.  ACQUISITIONS

On March 20, 1996,  the Company  completed  the  acquisitions  of two  companies
involved in CTI  applications:  Aurora  Systems,  Inc.  ("Aurora") and Key Voice
Technologies,  Inc. ("KVT"). Aurora, based in Acton, Massachusetts, is a leading
provider  of  off-the-shelf  CTI  products.  KVT,  based in  Sarasota,  Florida,
develops,  assembles,  markets,  and sells voice processing  systems and related
products for business applications. As a result of the acquisitions,  Aurora and
KVT have become wholly-owned  subsidiaries of the Company. The operating results
of Aurora and KVT from March 20, 1996 to December 31, 1996 have been included in
the Company's consolidated results of operations.

The  consideration  paid for the  acquisition of Aurora was  approximately  $2.8
million,  of which $1.9 million was paid in cash and approximately  $0.9 million
was paid by  issuance  of 147,791  shares of the  Company's  Common  Stock.  The
consideration  paid  for the  acquisition  of KVT  totaled  approximately  $19.0
million,  of which $8.5  million was paid in cash,  $7.0 million was paid by the
Company's  issuance of a promissory note ("Promissory  Note"),  and $1.5 million
was paid by the  issuance  of  243,097  shares of the  Company's  Common  Stock.
Depending on KVT's performance during the three years following the acquisition,
the Company may be obligated to pay an  additional  $2.0 million  which,  at the
Company's  option,  may be paid in cash or  evidenced  by the  issuance of up to
216,086 shares of the Company's Common Stock.

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

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

Had the Aurora and KVT acquisitions been made at the beginning of the year prior
to the  acquisitions,  the Company's pro forma unaudited results would have been
the following at December 31:
------------------------------------------------------------------------------
In thousands except per share amounts               1996             1995    
------------------------------------------------------------------------------
  Net sales                                      $104,606         $102,346
  Net income                                       $1,391           $6,802
  Earnings per share                                $0.16                -
  Earnings per share fully diluted                      -            $0.79
------------------------------------------------------------------------------

The unaudited pro forma  information is presented for comparative  purposes only
and is not  necessarily  indicative  of the results that would have occurred had
the acquisitions been consummated at the beginning of the periods presented, nor
is it necessarily indicative of future operating results.

NOTE 3.  INVENTORIES

Inventory consists of the following:
--------------------------------------------------------------------------
December 31,
In thousands                                       1996               1995
--------------------------------------------------------------------------
 
   Finished goods                                $6,529             $3,808
   Work-in-process                                3,681              4,202
   Materials and supplies                         9,376              9,915
                                                  -----              -----
       Total                                    $19,586            $17,925
                                                =======            =======
--------------------------------------------------------------------------

NOTE 4.  PROPERTY

Property consists of the following:
-------------------------------------------------------------------------
December 31,
In thousands                                       1996              1995
-------------------------------------------------------------------------
   Land                                            $556              $396
   Buildings and improvements                    13,555            11,763
   Machinery and equipment                       28,759            27,547
   Less accumulated depreciation                (27,553)          (25,763)
                                                -------           -------
       Property - Net                           $15,317           $13,943
                                                =======           =======
-------------------------------------------------------------------------

Depreciation  expense charged to operations for the years 1996,  1995, and 1994,
was $2,598,000, $2,422,000, and $2,601,000, respectively.

NOTE 5.  LEASE OBLIGATIONS

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

------------------------------------------------------------------------------
Year Ending December 31,                        Capital          Operating
In thousands                                    Leases              Leases
------------------------------------------------------------------------------
   1997                                             $184             $1,811
   1998                                              136              1,682
   1999                                                3              1,144
   2000                                                -                154
   2001                                                -                114
                                                    ----             ------
   Total minimum lease commitments                   323             $4,905
                                                                     ======
      Less amounts representing interest 
        and other costs                              (39)
                                                    ----
   Principal portion of minimum lease
     commitments at December 31, 1996               $284
                                                    ====
------------------------------------------------------------------------------

Assets recorded under capital leases  (included in property in the  accompanying
Consolidated Balance Sheets) are as follows:
-----------------------------------------------------------------------
December 31,
In thousands                                    1996             1995
-----------------------------------------------------------------------
    Machinery and equipment                     $823             $1,843
       Less accumulated depreciation            (431)              (690)
                                                ----              -----
    Property - Net                              $392             $1,153
                                                ====             ======
-----------------------------------------------------------------------

During  1996,  1995,  and 1994,  the  Company  entered  into new  capital  lease
obligations  which  amounted to  approximately  $67,000,  $9,000,  and $228,000,
respectively.

Operating  leases and  rentals  are for office  space,  and  factory  and office
equipment.  Total rent expense for operating leases, including rentals which are
cancelable on short-term  notice,  for the years ended December 31, 1996,  1995,
and 1994, was $1,721,000, $1,262,000, and $1,023,000, respectively.

NOTE 6.  DEBT

Long-term debt consists of the following:

------------------------------------------------------------------------------
December 31,
In thousands                                      1996                  1995
------------------------------------------------------------------------------
  Notes payable to Fleet
       Term notes I and II (1)                    $  -                 $4,030
       Acquisition note (2)                       7,249                     -
       Equipment note (3)                           463                     -
       Revolving credit (4)                       1,749                     -
  Promissory note (5)                             7,000                     -
  Other (6)                                         311                     -
  Capitalized leases (7)                            284                   717
                                                -------                ------
       Total debt                                17,056                 4,747
          Less current maturities on debt         5,343                 1,903
                                                -------                ------
  Total long-term debt                          $11,713                $2,844
                                                =======                ======
------------------------------------------------------------------------------

The  Company  and  Fleet  entered  into a loan  and  security  agreement  ("Loan
Agreement")  in 1994  pursuant to which Fleet  provided  the Company with a $6.0
million  term loan  represented  by a note ("Term Note I"),  and a $9.0  million
revolving  credit loan facility  ("Revolver") in an aggregate amount up to $14.0
million.  On April 29, 1994, the Company and Fleet amended the Loan Agreement to
permit the Company to borrow an additional  $1.3 million  represented by another
note ("Term  Note II") to finance  the  purchase  of  additional  surface  mount
technology  equipment.  Term Note II was payable in 44 equal monthly payments of
$27,000, with the balance due on February 1, 1998.

(1) Term Notes I and II aggregating  $7,300,000 carried interest rates of 1-1/2%
over Fleet's prime rate and were payable in equal monthly principal installments
of $110,334,  with the balance due on February 1, 1998.  Fleet's  prime rate was
8.25% and 8.50% at March 31, 1996 and December 31, 1995, respectively.

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

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

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

(4)  Availability  under the amended Revolver of up to $12.5 million is based on
eligible accounts receivable and inventory, less funds already borrowed. On June
28,  1996,   the  Company  and  Fleet  amended  the  Loan  Agreement  to  adjust
availability  under the Amended Revolver by establishing a special  availability
reserve of $4.0 million and modified certain  covenants.  The original  Revolver
carried an  interest  rate of 1.00% over  Fleet's  prime rate with  availability
based on eligible accounts receivable and inventory.

The Acquisition Loan,  Equipment Loan, and Amended Revolver carry interest rates
at either Fleet's prime rate or the London  Interbank  Offered Rate ("LIBOR") at
the Company's  option.  The interest rates can be adjusted annually based on the
Company's  debt to earnings  ratio which will vary the rates from minus 0.50% to
plus 0.50% under or above  Fleet's prime rate and from plus 1.50% to 2.50% above
LIBOR.  As of December 31, 1996,  Fleet's prime  interest rate was 8.25% and the
LIBOR rate was 5.66% with  approximately  79% of the loans based on LIBOR. As of
December 31, 1996, the Company's borrowing rate for loans based on the prime and
LIBOR rates was 8.25% and 7.66%, respectively.

(5) The Promissory Note in the principal amount of $7.0 million,  which was part
of the purchase  price of KVT,  carries an interest rate equal to the prime rate
with annual  payments of $1.4 million plus  accumulated  interest for five years
starting on March 20, 1997.

(6) Other debt  consists  of a mortgage  acquired  in  conjunction  with the KVT
acquisition  which  requires a monthly  mortgage  payment  of $2,817,  including
interest at a rate of 8.75%. The final payment is due on August 1, 2005.

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

Scheduled  maturities  of current  and  long-term  debt for the Fleet  Notes (as
defined in the Loan  Agreement),  the Promissory Note, and other debt (excluding
the Amended Revolver and leasing agreements) are as follows:
--------------------------------------------------------------------------------
                                                                      Principal
In thousands                              Fiscal Years              Installments
--------------------------------------------------------------------------------
    Notes payable                              1997                     $3,437
                                               1998                      3,252
                                               1999                      3,114
                                               2000                      3,115
                                               2001                      1,836
                                                Beyond 2001                269
--------------------------------------------------------------------------------

Debt Covenants

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

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

On  September  27,  1996,  the Company and Fleet  amended the Loan  Agreement to
modify  certain  covenants.  The amended Loan  Agreement  also contains  certain
limits on  additional  borrowings.  As of December 31, 1996,  the Company was in
compliance with the terms of the Loan Agreement.

NOTE 7.  INCOME TAXES

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





---------------------------------------------------------------------------
                                                 Liability Method
In thousands                              1996           1995          1994
---------------------------------------------------------------------------

    Current -       Federal                  $59          $142           $88
                    State                    159            27            28
    Deferred -      Federal                 (714)       (4,374)            -
                    State                    (22)         (129)            -
                                            ----        ------           ---
       Total provision/(benefit)           $(518)      $(4,334)         $116
                                           =====       =======          ====
---------------------------------------------------------------------------

The income tax provision  reconciled to the tax computed at statutory  rates for
the years ended December 31 is summarized as follows:
------------------------------------------------------------------------------
In thousands                                       1996        1995       1994
------------------------------------------------------------------------------
    Federal tax at statutory rate
     (35% in 1996, 1995, and 1994)                 $452      $1,937     $1,306
    State income taxes (net of federal tax
      benefit)                                      103          18         18
    Nondeductible charges                           329          46         34
    Alternative minimum tax                          77         139         84
    Utilization of operating loss carryover        (743)     (1,971)    (1,326)
   Adjustment of valuation allowance               (736)     (4,503)         - 
                                                  -----      ------       ----
       Income tax provision/(benefit)             $(518)    $(4,334)      $116
                                                  =====     =======       ====
------------------------------------------------------------------------------

Net deferred tax assets of $5,239,000 and $4,503,000 have been recognized in the
accompanying  Consolidated  Balance  Sheets  at  December  31,  1996  and  1995,
respectively. The components of the net deferred tax assets are as follows:

------------------------------------------------------------------------------
In thousands                                  1996                       1995
------------------------------------------------------------------------------
    Total deferred tax assets              $27,709                    $28,091
    Total valuation allowance              (20,240)                   (21,397)
                                            ------                     ------ 
     Total deferred tax assets - net         7,469                      6,694
   Total deferred tax liabilities           (2,230)                    (2,191)
                                            ------                     ------
    Total                                   $5,239                     $4,503
                                            ======                     ======
------------------------------------------------------------------------------

The valuation allowance decreased  $1,157,000 during the year ended December 31,
1996. The decrease was primarily  related to (1) the re-evaluation of the future
utilization of net operating losses ("NOLs") of $736,000, and (2) the net change
in temporary differences of deferred tax assets,  deferred tax liabilities,  and
operating loss carryforwards of $421,000.  The Company  periodically reviews the
requirements for a valuation  allowance and makes  adjustments to such allowance
when  changes in  circumstances  result in changes in judgment  about the future
realization of deferred tax assets.  Based on a continual  re-evaluation  of the
realization of the deferred tax assets, the valuation  allowance was reduced and
a tax benefit of $736,000 was  recognized  in the quarter  ended March 31, 1996.
Management believes, although realization is not assured, that it is more likely
than not that the  Company  will  realize  this tax  benefit.  The amount of the
deferred tax asset considered realizable,  however, could be reduced in the near
term if estimates of future taxable income during the  carryforward  periods are
reduced.

The  Company  has net  operating  loss and credit  carryovers  of  approximately
$64,986,000 and $3,075,000, respectively, which, if not utilized, will expire as
follows:

-------------------------------------------------------------------------------
In thousands                         Net Operating
  Expiration Dates                      Losses                      Tax Credits
-------------------------------------------------------------------------------
          1997                            $18                            $412
          1998                              -                           1,846
          1999                         21,359                             504
          2000                         27,762                              66
          2001                          5,260                               -
            After 2001                 10,587                             247
                                       ------                           -----
            Total                     $64,986                          $3,075
                                      =======                          ======
-------------------------------------------------------------------------------

Based on the  Company's  interpretation  of Section 382 of the Internal  Revenue
Code,  the reduction of the valuation  allowance was  calculated  assuming a 50%
ownership  change,  which could limit the  utilization  of the tax net operating
loss and tax credit  carryforwards in future periods starting at the time of the
change.  An  ownership  change  could  occur if changes in the  Company's  stock
ownership  exceeds 50% of the value of the Company's stock during any three year
period. The amount of net operating loss  carryforwards  expected to be utilized
resulting in the reduction of the valuation  allowance of $5,239,000  assumes an
ownership change will take place.

The components of the net deferred tax assets (liabilities) at December 31, 1996
and 1995 are as follows:
---------------------------------------------------------------------------
Deferred Assets/(Liabilities)
In thousands                                           1996         1995    
----------------------------------------------------------------------------
    Net loss carryovers                               $22,095      $22,740
    Tax credit carryovers                               3,075        3,153
    Inventory write downs and capitalization            1,068        1,057
    Pension                                               265          354
    Postretirement                                        304          290
    Compensation and benefits                             196          169
    Capitalized software development costs                266          277
    Contingencies                                          37           21
    Other deferred tax assets                              46           18
    Fixed asset depreciation                           (2,230)      (2,179)
    Goodwill amortization                                 358            -
    Income reported in different periods for
      financial reporting and tax purposes                  -            -
    Other deferred tax liabilities                          -            -
                                                      -------       ------
      Net deferred tax asset                           25,480       25,900
    Less:  Valuation allowance                        (20,241)     (21,397)
                                                       ------      -------
      Total                                            $5,239       $4,503
                                                       ======       ======
---------------------------------------------------------------------------

NOTE 8.  PENSION AND SAVINGS PLANS

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

The  following  table  sets  forth the  funded  status of the plans and  amounts
recognized in the Company's Consolidated Balance Sheets at December 31, 1996 and
1995.
<TABLE>
<CAPTION>
<S> <C>
------------------------------------------------------------------------------------------
In thousands                                                   1996              1995
------------------------------------------------------------------------------------------
    Actuarial present value of benefit obligation:
    Accumulated benefit obligation (including vested
      benefits of $12,313 and $10,499, respectively)          $(13,391)        $(11,473)
                                                              ========         ========

    Projected benefit obligation for service to date          $(14,218)        $(12,102)
    Plan assets at fair value                                   15,679           12,345
                                                               -------          -------
    Plan assets more than projected benefit obligation           1,461              243
    Unrecognized net gain from past experience                  (2,065)          (1,064)
    Unrecognized net gain from prior service cost                 (254)            (288)
    Unrecognized net asset at date of implementation of
      SFAS No. 87 amortized over 14 years                          (86)            (115)
                                                               -------          -------
      Accrued liabilities for benefit plans at December 31       $(944)         $(1,224)
                                                               =======          =======
------------------------------------------------------------------------------------------
</TABLE>

Net  periodic  pension cost for 1996,  1995,  and 1994  included  the  following
components:
<TABLE>
<CAPTION>
<S> <C>
---------------------------------------------------------------------------------------
In thousands                                           1996        1995          1994
---------------------------------------------------------------------------------------
    Service cost-benefits earned during the period    $1,081        $931          $982
    Interest cost on projected benefit obligation        890         751           657
    Actual (return) or loss on plan assets            (2,634)     (2,122)          106
    Net amortization and deferral of other items       1,510       1,199          (919)
                                                       -----       -----          ----
       Net periodic pension cost                        $847        $759          $826
                                                        ====        ====          ====
---------------------------------------------------------------------------------------
</TABLE>

Assumptions used in accounting for the plans were as follows:
--------------------------------------------------------------------------------
                                                    1996       1995        1994
--------------------------------------------------------------------------------
    Discount rate                                   7.50%      7.50%       8.00%
    Rate of increase in future compensation levels  4.00%      4.00%       4.00%
    Expected long-term rate of return on assets     9.00%      9.00%       9.00%
--------------------------------------------------------------------------------

In addition to providing pension benefits,  the Company  contributes to a 401(k)
plan, based on an employee's contributions.  Participants can contribute from 2%
to 10% of their  salary as defined in the terms of the plan.  The Company  makes
matching  contributions  equal  to 25%  of a  participant's  contributions.  The
Company's  total  expense for the matching  portion to the 401(k) plan for 1996,
1995, and 1994 was $341,000, $278,000, and $261,000, respectively.

NOTE 9.  POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The effect of SFAS No. 106, "Employers'  Accounting for Postretirement  Benefits
Other Than Pensions," on income from continuing  operations for 1996,  1995, and
1994 was an expense of $41,000, $311,000, and $289,000, respectively.

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

The  following  table sets forth the amounts of the  accumulated  postretirement
benefit obligation at January 1, 1996, 1995, and 1994:

<TABLE>
<CAPTION>
<S> <C>
----------------------------------------------------------------------------------------
In thousands                                          1996           1995           1994
----------------------------------------------------------------------------------------
    Retirees                                          $137           $354           $398
    Actives eligible to retire                         415            653            628
    Other active participants ineligible to retire     208            922            972
                                                       ---          -----          -----
       Total                                          $760         $1,929         $1,998
                                                      ====         ======          =====
----------------------------------------------------------------------------------------
</TABLE>

Net  postretirement  benefit  cost for years ended  December 31 consisted of the
following components:
------------------------------------------------------------------------------
In thousands                                       1996       1995        1994
------------------------------------------------------------------------------
    Service cost                                    $20        $75         $59
    Interest cost                                    55        156         139
    Actual return on assets                           -          -           -
    Amortization of the unrecognized transition
     obligation                                      91         91          91
    Amortization of gain                           (125)       (11)          -
    Amortization of prior service cost                -          -           -
                                                    ---        ---        ----
        Total                                       $41       $311        $289
                                                    ===       ====        ====
------------------------------------------------------------------------------

The following table sets forth funded status of the plans and amounts recognized
in the Company's Consolidated Balance Sheets at December 31, 1996 and 1995.
------------------------------------------------------------------------------
In thousands                                                    1996      1995
------------------------------------------------------------------------------
    Plan assets at fair value                                    $ -       $ -
    Accumulated postretirement benefit obligation
       Retirees                                                 (137)     (379)
       Fully eligible participants                              (415)     (699)
       Other active participants                                (208)     (996)
    Unrecognized prior service cost                                -         -
    Unrecognized net gain                                     (1,583)     (320)
    Unrecognized transition obligation                         1,449     1,540
                                                               -----     -----
       Accrued liabilities for benefit plans at December 31    $(894)    $(854)
                                                               =====     ======
------------------------------------------------------------------------------

The  assumed  health  care cost trend  rate used in  measuring  the  accumulated
postretirement  benefit  obligation as of January 1, 1996 was 10% for 1996,  the
trend rate  decreasing each successive year until it reaches 5.25% in 2004 after
which it remains constant. The discount rate used in determining the accumulated
postretirement  benefit  obligation  cost  was  7.75%.  A  one  percentage-point
increase in the assumed health care cost trend rate for each year would increase
the accumulated  postretirement benefit obligation as of January 1, 1996 and net
postretirement  health care cost by  approximately  $4,000 and service cost plus
interest cost by approximately $9,000. The postretirement  benefit obligation is
not funded and does not  include  any  provisions  for  securities,  settlement,
curtailment, or special termination benefits.

NOTE 10.  PUBLIC STOCK OFFERING

In August 1995, the Company  completed a public offering of 3,000,000  shares of
Common Stock (the  "Offering") at $12.00 per share.  Of the 3,000,000  shares of
Common  Stock,  2,000,000  were offered by PCI and  1,000,000  were newly issued
shares by the Company.

The net  proceeds to the Company  from the Offering  were  $11,200,000.  A major
portion of the proceeds were used to redeem all of the remaining  750,000 shares
of Series A Preferred  Stock  ("Preferred  Stock") held by PCI, pay  accumulated
dividends on the Preferred Stock to PCI, and pay the costs of the Offering.  The
remaining proceeds were used for general corporate and working capital purposes.

Concurrent with the Offering, the Company declared a one-for-three reverse stock
split of the  Company's  Common  Stock.  The net effect of the  Offering and the
reverse stock split was a decrease in the number of outstanding shares of Common
Stock from  approximately  21.3 million to 8.1 million.  All  references  in the
financial statements to number of shares, per share amounts and market prices of
the  Company's  Common Stock for periods prior to the third quarter of 1995 have
been retroactively restated to reflect the one-for-three reverse stock split.

NOTE 11.  STOCK-BASED COMPENSATION PLANS

As of December  31,  1996,  the Company had two basic  stock-based  compensation
plans. The 1992 Stock Incentive Plan (the "Stock Incentive Plan"),  provides for
stock  options  to  purchase  shares of Common  Stock  which may be  granted  to
officers, directors, and certain key employees as additional compensation. Under
the 1992  Non-employee  Directors  Stock  Incentive Plan (the  "Directors  Stock
Incentive  Plan"),  each  non-employee  director was awarded 1,666 shares of the
Company's  Common Stock for each fiscal year the Company reports  income.  As of
January  1996,  the  Directors  Stock  Incentive  Plan was amended to award each
non-employee  director  2,500  shares of the  Company's  Common Stock under such
circumstances.  In 1996,  each  non-employee  director was awarded  1,666 shares
related to income  earned by the  Company  for fiscal  year 1995.  The plans are
composed of stock options,  restricted stock,  nonstatutory stock, and incentive
stock.  The  Company's  incentive  plans are  administered  by the  Compensation
Committee of the Company's Board of Directors.

 . On April 30,  1996,  the  Company's  stockholders  approved  a  resolution  to
increase  the number of shares of Common  Stock under the  Company's  1992 Stock
Incentive  Plan from 800,000 to 1,550,000.  As of December 31, 1996, all options
issued under the Company's 1982 Stock  Incentive Plan have either been exercised
or have  expired.  The Company has  previously  accepted  notes  relating to the
non-qualified  stock options  exercised by officers and  employees.  These notes
receivable  relating to stock  purchases  amounted to  $168,000,  $176,000,  and
$182,000 at December  31,  1996,  1995,  and 1994,  respectively,  and have been
deducted from Stockholders' Equity.

Options  granted  for years  1996 and 1995 have a maximum  term of ten years and
vest over a three year period. Options become exercisable in installments of 33%
per year on each of the first through the third anniversaries of the grant date.
All options  granted through the Stock Incentive Plan are granted at an exercise
price equal to the market price of the Company's Common Stock on the grant date.

The Company applies APB No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plan other than the performance based option that is part of the plan for
its directors.  Common Stock has been issued by the Company to its directors for
years that show positive net income. The compensation cost that has been charged
against income for its director's performance-based stock was $66,000, $116,000,
and $130,000 for 1996, 1995, and 1994, respectively.

Information regarding stock options is summarized below:
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------------------------------------------------------------------
                                      1996         (1)             1995          (1)          1994     (1),(2)
--------------------------------------------------------------------------------------------------------------
Options outstanding,
   January 1;                       449,241       $6.50           363,172       $3.68        451,377      $1.84
    Granted                         277,062        9.12           268,073        7.95         92,000       9.80
    Exercised                       (52,617)       1.58          (157,044)       2.13       (146,558)      1.98
    Terminated                      (14,162)       8.72           (24,960)       7.00        (33,647)      3.09
                                    -------                       -------                    -------
Options outstanding,
   December 31;                     659,524        7.95           449,241        6.50        363,172       3.68
                                    =======                       =======                    =======

Options exercisable,
   December 31;                     212,392        6.30           160,403        5.07        174,599       1.88

Per share ranges of
  options outstanding
  at December 31                        $1.41-$11.75                  $1.41-$11.75                 $1.41-$10.59
Dates through which options
    outstanding at December 31,
   were exercisable                      1/97-5/2006                  1/96-11/2005                 1/95-10/2004

(1)  Fair value weighted-average exercise price at grant date.
(2)  1994 has been restated to reflect the one-for-three reverse stock split.
--------------------------------------------------------------------------------------------------------------
</TABLE>

The following table summarizes  information concerning currently outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
------------------------------------------------------------------------------------------------------------
                                Options Outstanding                               Options Exercisable
                                -------------------                               -------------------
Range of                Number  Weighted-Average                                        Number
Exercise             Outstanding    Remaining         Weighted-Average        Exercisable     Weighted-Average
Prices             at 12/31/96   Contractual Life     Exercise Price          at 12/31/96     Exercise Price
------------------------------------------------------------------------------------------------------------
    $1.41 to  3.00      70,012          5.8                  $1.64                70,012              $1.64
     5.73 to  7.77     252,198          8.5                   7.39                85,563               7.38
     8.82 to  9.38     256,835          9.1                   9.34                 9,113               8.98
    10.50 to 11.75      80,479          7.5                  10.75                47,704              10.68
                        ------                                                    ------                   
     1.41 to 11.75     659,524          8.3                   7.95               212,392               6.30
                       =======                                                   =======                      
------------------------------------------------------------------------------------------------------------
</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:
------------------------------------------------------------------------------
                                      1996                       1995
------------------------------------------------------------------------------
Risk-free interest rate               6.18%                      6.90%
  Expected life                       3.82                       3.02
  Expected volatility                   90%                       101%
  Expected dividends                  None                       None
------------------------------------------------------------------------------

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

------------------------------------------------------------------------------
 In thousands except per share amounts             1996            1995      
------------------------------------------------------------------------------
  Net income:                    As reported         $1,809           $9,519
                Compensation expense                    218
                                 Pro forma           $1,591           $9,519

  Earnings per common share:     As reported          $0.21                -
                                 Pro forma            $0.19                -

  Primary earnings per share:    As reported              -            $1.24
                                 Pro forma                -            $1.24

  Fully diluted earnings per share:
                                 As reported              -            $1.20
                                 Pro forma                -            $1.20
------------------------------------------------------------------------------

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

NOTE 12.  SEGMENT INFORMATION

During 1996,  1995,  and 1994,  substantially  all of the Company's  sales,  net
income, and identifiable net assets were attributable to the  telecommunications
industry.

The  Company  had  sales in excess  of 10% of net  sales to three  customers  as
follows:

------------------------------------------------------------------------------
In thousands                              1996            1995          1994
------------------------------------------------------------------------------
    Sales:
       ALLTEL Supply, Inc.               $19,471         $20,575       $12,370
       Graybar Electric Company, Inc.     31,719          30,857        31,298
       Sprint/North Supply , Inc.         22,433          18,357        16,305

    Percentage of net sales:
       ALLTEL Supply, Inc.                   19%             22%           16%
       Graybar Electric Company, Inc.        31%             33%           41%
       Sprint/North Supply , Inc.            22%             19%           21%
------------------------------------------------------------------------------

ALLTEL Supply,  Inc., a subsidiary of ALLTEL  Corporation,  was a shareholder of
the Company  until 1996.  As of December 31, 1995 and 1994,  ALLTEL had accounts
receivable with the Company of $1,415,000 and $588,000, respectively.

NOTE 13.  COMMITMENTS AND CONTINGENT LIABILITIES

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

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

In October 1994, the Company installed all the required  equipment in accordance
with the  remediation  plan and  started the  process of pumping  hydraulic  oil
residue  from  the  underground  water.  The  oil  is  deposited  into  approved
containers and taken to a hazardous waste site in accordance with the corrective
action  plan.  As of  December  31,  1996,  the Company  has  incurred  costs of
approximately  $37,000 and expects the pumping  process to be completed by early
1998.

NOTE 14.  QUARTERLY FINANCIAL DATA (UNAUDITED)

Net earnings per share for quarters prior to the third quarter of 1995 have been
restated to reflect the one-for-three reverse stock split.
<TABLE>
<CAPTION>
<S> <C>
------------------------------------------------------------------------------------------------------------
                                                             First         Second       Third        Fourth
In thousands except per share amounts                         Quarter      Quarter      Quarter      Quarter
------------------------------------------------------------------------------------------------------------
1996
    Sales                                                     $22,048      $23,562      $28,874      $27,745
    Gross profit                                                7,483        8,147       10,861       11,327
    Interest expense                                              227          499          483          417
    Goodwill amortization                                          91          868          855          860
    Net income                                                  1,185       (1,628)         908        1,344
    Net earnings per common share:                               0.14        (0.19)        0.11         0.16
------------------------------------------------------------------------------------------------------------
1995
    Sales                                                     $22,316      $25,442      $25,235      $21,809
    Gross profit                                                7,124        8,254        8,054        7,343
    Interest expense                                              273          282          242          199
    Goodwill amortization                                          23            -            -            -
    Net income                                                  1,230        6,349        1,804          486
    Dividends on preferred stock                                  143          142           65            -
    Net earnings per common share: Primary                       0.15         0.85         0.22         0.06
------------------------------------------------------------------------------------------------------------
</TABLE>

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

For all quarters of 1996, the net earnings per common and equivalent shares were
antidilutive.

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

The Company  recognizes  costs  based on  estimates  throughout  the fiscal year
relating to  inventory.  The results of the  physical  inventory  and the fiscal
year-end close reflected a favorable  adjustment with respect to such estimates,
resulting in approximately  $289,000 of additional income, which is reflected in
the  fourth  quarter  of  1996.  In the  second  quarter  of 1995,  the  Company
re-evaluated  the future  utilization  of its deferred tax assets and decided it
was more likely than not that the Company will  realize a tax benefit.  Based on
the re-evaluation of the realizability of the deferred tax assets, the valuation
allowance was reduced and a tax benefit of $4,503,000 was  recognized  (see Note
7).

In the third quarter of 1995, the Company completed a public stock offering with
a concurrent one-for-three reverse stock split (see Note 10).

For the fourth quarter of 1995,  net earnings per common share was  antidilutive
for the period. Both fully diluted and primary earnings per share were $0.06 for
the fourth quarter of 1995.  Certain interim inventory  estimates are recognized
throughout the fiscal year relating to shrinkage, obsolescence, and product mix.
The results of the physical  inventory and the fiscal year-end close reflected a
favorable adjustment with respect to such estimates,  resulting in approximately
$295,000 of additional income, which is reflected in the fourth quarter of 1995.





<TABLE>
<CAPTION>
<S> <C>
-----------------------------------------------------------------------------------------------------------------
FIVE YEAR FINANCIAL DATA

Selected Consolidated Statements of Operations Data
-----------------------------------------------------------------------------------------------------------------
In thousands except
     per share amounts                                1996         1995         1994         1993         1992
-----------------------------------------------------------------------------------------------------------------
Net sales:
    As reported (1)                                 $102,229      $94,802      $77,145      $69,099      $70,897
    Current product lines (2)                        102,229       94,802       77,145       69,099       64,423
Income before income taxes
    and extraordinary item                             1,291        5,535        3,730        2,545          897
Net income                                             1,809        9,869        3,225        2,416          884
Earnings per common share
    and common equivalent share:
      Primary: (3)                                      0.21         1.24         0.37         0.35         0.13
-----------------------------------------------------------------------------------------------------------------
(1)  Prior years have been reclassified to conform to 1996 presentation.
(2)  Excludes sales of the electromechanical product line.
(3)  Earnings per share prior to 1995 have been restated to reflect the one-
     for-three reverse stock split.  1996 is anti-dilutive.
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Selected Consolidated Balance Sheet Data
-----------------------------------------------------------------------------------------------------------------
In thousands                                          1996         1995         1994         1993         1992
-----------------------------------------------------------------------------------------------------------------
Current assets                                       $30,767      $33,740      $26,199      $28,301      $24,389
Total assets                                          74,352       56,692       42,260       44,803       41,747
Current liabilities                                   20,159       15,469       14,568       13,358       11,985
Long-term debt and other
    long-term liabilities                             15,629        6,929        6,649       20,695       22,251
Stockholders' equity                                  38,564       34,294       21,043       10,750        7,511
-----------------------------------------------------------------------------------------------------------------
</TABLE>

RELATED STOCKHOLDERS MATTERS

Quarterly Common Stock Information

The  following  table  sets  forth,  for the  periods  shown,  the  high and low
quarterly closing sales prices in the over-the-counter  market for the Company's
Common  Stock,  as  reported by the  National  Association  of Security  Dealers
Automated  Quotation System ("Nasdaq").  The Company's Common Stock is traded in
the  National  Market  System of the Nasdaq  Stock  Market  under the  Company's
symbol,  CMDL.  The  following  common stock  information  has been  restated to
reflect the one-for-three reverse stock split.
<TABLE>
<CAPTION>
<S> <C>
-----------------------------------------------------------------------------------------------------------------
                                                          1996                                      1995
Fiscal Quarters                                  High               Low                      High            Low
-----------------------------------------------------------------------------------------------------------------
    First Quarter                             11  3/8           8     -                   9     -         6  3/4
    Second Quarter                            12  1/2           9   1/4                  15   3/8         7  7/8
    Third Quarter                              9    -           6     -                  14  13/16       11  1/4
    Fourth Quarter                             7  7/8           5   7/8                  13   7/8         7  3/4
-----------------------------------------------------------------------------------------------------------------
</TABLE>

The  Company  has never  paid a dividend  on its  Common  Stock and its Board of
Directors currently intends to continue for the foreseeable future the policy of
not paying cash dividends on Common Stock. The Company is prohibited from paying
dividends  due to the Loan  Agreement  with Fleet  except on Series A  Preferred
Stock (see Note 6 to Consolidated Financial Statements).

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

OFFICERS

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

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

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

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

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

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

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

BOARD MEMBERS

William G. Mustain, Chairman - See previous page.

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

William E. Porter, President of Interactive Consumer, Inc.
Mr. Porter is President,  Interactive  Consumer,  Inc. Between December 1995 and
January 1997, Mr. Porter has served in several  executive  positions with Trigon
Blue Cross Blue Shield  (formerly  Blue Cross Blue Shield of Virginia).  Mr. Mr.
Porter has served as a director of the Company since July,  1994 and is a member
of the Compensation and Nominating Committees of the Board of Directors.

Michael C.  Henderson,  President  and Chief  Executive  Officer  of  PacifiCorp
Holdings, Inc.
Mr. Henderson is President and Chief Executive  Officer of PacifiCorp  Holdings,
Inc.,  a PacifiCorp  subsidiary  which owns Pacific  Telecom,  Inc.,  PacifiCorp
Generation Company ("P.G."),  Powercor, and PacifiCorp Financial Services,  Inc.
("PFS").  He is also President and Chief Executive Officer of PFS, a diversified
financial  services  company.  Mr.  Henderson serves as Chairman of the Board of
Albina Community Bancorp.  Mr. Henderson has served as a director of the Company
since 1995 and is a member of the Audit Committee.

Dianne C. Walker, Independent Consultant
Ms.  Walker is an  independent  consultant.  Prior to  January  1995,  she was a
consultant to Bear Stearns & Co. Inc., an  investment  banking firm.  Ms. Walker
has served as a director of the Company  since 1986 and is a member of the Audit
and Pension Committees of the Board of Directors.

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


Transfer Agent and Registrar            Form 10-K
 ChaseMellon Shareholder Services       On written request, Comdial Corporation
 New York, New York                     will furnish to stockholders a copy of
                                        its Form 10-K for the most recent year.
Independent Auditors                    Address your request to Linda Falconer,
 Deloitte & Touche LLP                  Comdial Corporation, P.O. Box 7266,
 Richmond, Virginia                     Charlottesville, Virginia  22906-7266

Investor Relations                      World Wide Web
Dick Bucci - Director,                  http://www.comdial.com
             Investor Relations
Phone:  (804) 978-2525
Fax:    (804) 978-2438
E-Mail:  dbucci@comdial.com