10-Q

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

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-9023

COMDIAL CORPORATION
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
94-2443673
(I.R.S. Employer
Identification Number)

106 Cattlemen Road, Sarasota, Florida
(Address of principal executive offices)
34232
(Zip Code)

Registrant’s telephone number, including area code: (941) 922-3800

Indicate by check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

The number of shares outstanding of each of the issuer’s classes of Common Stock, as of November 8, 2002 was 62,774,824 shares, all of one class (Common Stock), par value $0.01 per share.

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COMDIAL CORPORATION AND SUBSIDIARIES

INDEX

			PAGE
PART I	FINANCIAL INFORMATION
	ITEM 1:	Financial Statements
		Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2002 and 2001 (unaudited)	3
		Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001 (Restated)	4
		Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2002 and 2001 (unaudited)	5
		Notes to Condensed Consolidated Financial Statements (unaudited)	6
	ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	ITEM 3:	Quantitative and Qualitative Disclosures about Market Risks	23
	ITEM 4:	Controls and Procedures	23
PART II	OTHER INFORMATION
	ITEM 1:	Legal Proceedings	24
	ITEM 2:	Changes in Securities	24
	ITEM 4:	Submission of Matters to a Vote of Security Holders	24
	ITEM 6:	Exhibits and Reports on Form 8-K	26

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COMDIAL CORPORATION AND SUBSIDIARIES

PART 1.         FINANCIAL INFORMATION

ITEM 1.         FINANCIAL STATEMENTS

Consolidated Statements of Operations - (Unaudited)

	Three Months Ended						Nine Months Ended
In thousands, except per share amounts	September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
Net sales	$	12,480		$	22,882		$	37,764		$	61,258
Cost of goods sold		9,035			15,540			25,345			38,200
Gross profit		3,445			7,342			12,419			23,058
Operating expenses
Selling, general & administrative		4,995			7,168			15,353			22,556
Engineering, research &        development		1,170			1,530			4,217			5,178
Stock compensation expense		510			—			572			—
Restructuring		—			396			—			396
Goodwill amortization expense		—			423			—			1,518
Total operating expenses		6,675			9,517			20,142			29,648
Operating loss		(3,230	)		(2,175	)		(7,723	)		(6,590	)
Other expense (income)
Interest expense, net		5,810			834			6,984			2,119
Loss (gain) on sale of assets		89			35			417			(2,099	)
Miscellaneous (income) expense, net		(7,001	)		(47	)		(23,079	)		245
Income (loss) before income taxes		(2,128	)		(2,997	)		7,955			(6,855	)
Income tax (expense) benefit		—			—			—			—
Net income (loss)		(2,128	)		(2,997	)		7,955			(6,855	)
Preferred stock dividends		(125	)		—			(284	)		—
Gain on redemption of preferred stock		1,000			—			1,000			—
Net income (loss) applicable to     common stock		($1,253	)		($2,997	)	$	8,671			($6,855	)
Earnings (loss) per share:
Basic		($0.08	)		($0.33	)	$	0.54			($0.74	)
Diluted		($0.08	)		($0.33	)	$	0.48			($0.74	)
Earnings (loss) per share applicable     to common stock:
Basic		($0.05	)		($0.33	)	$	0.59			($0.74	)
Diluted		($0.05	)		($0.33	)	$	0.52			($0.74	)
Weighted average shares outstanding:
Basic		25,917			9,215			14,749			9,210
Diluted		25,917			9,215			16,707			9,210

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

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COMDIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	September 30, 2002			December 31, 2001
In thousands, except par value	(Unaudited)			(Restated)*
Assets
Current assets
Cash and cash equivalents	$	2,810		$	1,239
Accounts receivable (less allowance          for doubtful accounts:
2002 – $1,301; 2001 – $3,533)		8,529			11,559
Inventories		4,252			9,527
Prepaid expenses and other current assets		439			759
Deferred financing costs		5,332			—
Total current assets		21,362			23,084
Property and equipment - net		4,871			5,839
Goodwill - net		3,375			3,375
Capitalized software development costs – net		5,775			7,790
Other assets		3,844			3,648
Total assets	$	39,227		$	43,736
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities
Accounts payable	$	6,852		$	11,266
Accrued payroll and related expenses		1,568			1,778
Other accrued liabilities		2,568			4,994
Current maturities of debt		732			2,596
Total current liabilities		11,720			20,634
Long-term debt		15,971			26,912
Other long-term liabilities		2,010			5,830
Total liabilities		29,701			53,376
Stockholders’ equity (deficit)
Convertible preferred stock, $10.00 par value,          $10 per share liquidation preference          (Authorized 2,000 shares; issued and          outstanding: 2002 – 0; 2001 – 0)		—			—
Common stock, $0.01 par value          (Authorized 150,000 shares;          issued 2002 – 62,907;          2001 - 9,337)		629			93
Paid-in capital		134,102			123,427
Treasury stock, 132 shares, at cost		(1,296	)		(1,296	)
Accumulated deficit		(123,909	)		(131,864	)
Total stockholders’ equity (deficit)		9,526			(9,640	)
Total liabilities and stockholders’equity (deficit)	$	39,227		$	43,736

* Condensed from audited financial statements

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

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COMDIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows - (Unaudited)

	Nine Months Ended
In thousands	September 30, 2002			September 30, 2001
Cash flows from operating activities:
Net income (loss)	$	7,955			($6,855	)
Adjustments to reconcile net income (loss) to operating cash flows
Depreciation and amortization		4,327			6,120
Accretion of discount on bridge notes		3,230			—
Bad debt expense		150			(258	)
Gain on liability restructuring		(20,090	)		—
Gain on lease renegotiation		(2,834	)		—
Stock compensation expense		572			—
Inventory provision		392			(954	)
Loss (gain) on sale of assets		417			(2,099	)
Changes in working capital components:
Accounts receivable		2,915			(547	)
Inventory		2,843			(1,613	)
Prepaid expenses and other assets		514			(867	)
Accounts payable		(2,973	)		9,045
Other liabilities		(4,316	)		(2,472	)
Net cash used in operating activities		(6,898	)		(500	)
Cash flows from investing activities:
Proceeds from sale of American Phone Center		—			1,400
Proceeds from sale of assets		272			12,814
Capital expenditures		(25	)		(98	)
Capitalized software additions		(492	)		(1,557	)
Net cash (used in) provided by investing activities		(245	)		12,559
Cash flows from financing activities:
Proceeds from issuance of bridge notes		4,000			—
Proceeds from issuance of private placement debt		11,075			—
Net repayments under revolver agreement		(5,750	)		(12,220	)
Principal payments under notes payable		(251	)		(271	)
Principal payments under capital lease obligations		(360	)		(3	)
Net cash provided by (used in) financing activities		8,714			(12,494	)
Net increase (decrease) in cash and cash equivalents		1,571			(435	)
Cash and cash equivalents at beginning of period		1,239			2,428
Cash and cash equivalents at end of period	$	2,810		$	1,993
Supplemental information - Cash paid during the period for:     Interest	$	1,178		$	1,751
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Accounts payable converted to notes payable	$	288		$	1,198
Assets acquired through capital lease transactions		1,336			—
Debt converted to preferred stock		10,000			—
Warrants issued in connection with leasing arrangement		99			—
Warrants issued in connection with bridge financing		2,001			—
Warrants issued in connection with private placement financing		3,744			—
Stock issued in connection with conversion of bridge notes		533			—

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

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COMDIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 - (Unaudited)

NOTE A.      BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Comdial Corporation (“the Company” or “Comdial”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for the three and nine months ended September 30, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.

The balance sheet at December 31, 2001, has been derived from the audited financial statements at that date, as restated, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2001.

Reclassifications

The Company has reclassified certain amounts for the three and nine months ended September 30, 2001 to conform to the 2002 presentation. These and other reclassifications had no effect on operating or net income.

NOTE B.      FINANCINGS

On June 21, 2002, Comdial completed a private placement by issuing 7% senior subordinated secured convertible promissory notes (the “Bridge Notes”) in the aggregate principal amount of $2,250,000, pursuant to Subscription Agreements (the “Subscription Agreements”) which provided for up to $4 million of bridge financing to the Company (the “Bridge Financing”). During the third quarter of 2002, additional proceeds of $1,750,000 were received to complete the Bridge Financing. Proceeds of the Bridge Financing were to be used for working capital and to accelerate development and delivery of Comdial’s Small and Medium Business (SMB) telephony solutions. The Company’s Board of Directors obtained a fairness opinion from the investment banking firm of Raymond James & Associates, Inc. in connection with this transaction.

Under the terms of the Bridge Financing, the purchasers had the right to convert 13.33% of the principal amount of their respective Bridge Notes into shares of common stock at a conversion price of $0.01 per share. Pursuant to the Subscription Agreement, the purchasers were granted, among other things, registration rights with respect to their shares of common stock issuable upon conversion of the Bridge Notes. 

On or prior to September 27, 2002, each of the holders of the Bridge Notes exercised their right to convert 13.33% of the principal amount of the Bridge Notes (a total of $533,200) into shares of common stock at a conversion price of $0.01 per share. The Company issued an aggregate of 53,320,000 shares pursuant to such conversions.

On September 27, 2002, the Company consummated a closing of approximately $12.6 million under a private placement (the “Private Placement”), including the conversion of the remaining outstanding balance of Bridge Notes of approximately $3.5 million into this new debt. The Private Placement consisted of 7% subordinated secured convertible promissory notes (the “Placement Notes”) and warrants to purchase an aggregate of approximately 62.7 million shares of the Company’s common stock at an exercise price of $0.01 per share (the “Placement Warrants”). The Placement Notes are due in three years and provide for quarterly interest-only payments with the entire principal due upon maturity. The Placement Warrants, which were valued at $3.1 million using the Black Scholes method, were recorded as deferred financing costs and are being amortized over the term of the Placement Notes. An aggregate of 12.5 million of the Placement Warrants are subject to forfeiture, on a pro rata basis, if the Placement Notes are repaid during the first eighteen months following their issuance. Unless forfeited, the Placement Warrants vest after eighteen months and are exercisable until twenty-four months after issuance. The Placement Notes may in the future be convertible under certain circumstances at the option of the Company if the common stock of the Company trades at or above $1.00 for 20 consecutive trading days. The initial conversion price of the Placement Notes is $0.33 per share. The conversion price of the Placement Notes is subject to downward adjustment in the event of certain defaults. In addition, the common stock underlying the Placement Notes and the Placement Warrants are subject to certain registration rights.

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On October 29, 2002, the Company conducted a second and final closing (the “Second Closing”) under the Private Placement. The Second Closing included the issuance of $775,000 aggregate principal amount of 7% Notes, and 3,875,000 Placement Warrants. Of the Placement Warrants issued under the Second Closing, 775,000 are subject to forfeiture, on a pro rata basis, as described above.

Also on September 27, 2002, the Company consummated a private placement with Winfield Capital Corp. of $2.0 million (the “Winfield Transaction”). The Winfield Transaction consisted of 12% subordinated secured convertible promissory notes (the “Winfield Notes”) and warrants to purchase 5.5 million shares of common stock at an exercise price of $0.01 per share (the “Winfield Warrants”). The Winfield Notes are due in three years and provide for quarterly interest-only payments with the entire principal due upon maturity. The Winfield Warrants, which were valued at $0.3 million using the Black Scholes method, were recorded as deferred financing costs. The Winfield Notes are convertible on the same terms and subject to the same conditions as the Placement Notes. The Winfield Notes are senior in right of payment and security to the Placement Notes, and the underlying shares of common stock are subject to certain registration rights.

As previously reported, on June 7, 2002, Comdial entered into an advisory agreement with Commonwealth Associates, L.P. (“Commonwealth”) pursuant to which the Company engaged Commonwealth to perform financial advisory and consulting services in connection with the Bridge Financing and the restructuring of the Company’s outstanding indebtedness to its senior bank lender (the “Debt Restructuring”). Commonwealth received 250,000 shares of Comdial’s common stock upon signing of the agreement (the “Advisory Shares”) and warrants (the “Advisory Warrants”) to purchase 2,257,268 shares of common stock (representing 5% of our then outstanding fully-diluted capital stock) with an exercise price of $0.01 per share, upon the initial closing of the Bridge Financing on June 21, 2002. The Advisory Shares were valued using the stock price on the date of issuance and were expensed immediately. Commonwealth received additional Advisory Warrants of 1,146,934 because Comdial received additional proceeds of $1,750,000 from the Bridge Financing during the third quarter of 2003. The Advisory Warrants, which were valued at $2.0 million in total using the Black Scholes method, were recorded as deferred financing costs and amortized over the term of the Bridge Financing. The Advisory Warrants are exercisable at any time through June 21, 2007.

Pursuant to the Advisory Agreement, Commonwealth was also engaged to assist the Company in raising additional debt and/or equity securities and in securing a new senior lender. In connection with the Private Placement and the Winfield Transaction, Commonwealth received a 7% placement fee equaling approximately $1 million and approximately $0.3 million in expenses, which were recorded as deferred financing costs and are being amortized over the term of the Placement Notes and Winfield Notes. Also as a result of the Private Placement and the Winfield Transaction, the Company issued additional Advisory Warrants to Commonwealth to acquire a total of 6,820,900 shares of common stock at an exercise price of $0.01 per share. These warrants, which were valued at $0.3 million using the Black Scholes method, were recorded as deferred financing costs and are being amortized over the term of the Placement Notes and Winfield Notes. The Company received $775,000 in new investments from the Second Closing on October 29, 2002. In connection with the Second Closing, Commonwealth received a 7% placement fee equaling approximately $55,000 and approximately $44,000 in expenses. The Company issued additional Advisory Warrants to Commonwealth to acquire 387,500 shares of common stock at an exercise price of $0.01 per share. Three representatives of Commonwealth now serve on the Board of Directors of the Company.

As previously reported, ComVest Venture Partners, L.P. (“ComVest”), an affiliate of Commonwealth, entered into an agreement with Bank of America, N.A., (“BofA”), the Company’s senior lender, to purchase the senior secured debt position held by Bank of America in the Company and 1 million shares of the Company’s Series B Alternate Rate Preferred Stock (having a liquidation value of $10 million). Pursuant to such agreement, ComVest had the right to purchase for an aggregate of $6.5 million, the approximate $12.7 million in outstanding indebtedness owed by the Company to BofA and the 1 million shares of Preferred Stock. Contemporaneously with the closing of the Private Placement and the Winfield Transaction, ComVest assigned its right to purchase the debt and the Preferred Stock to the Company, and the Company used $6.5 million of the proceeds of the Private Placement and the Winfield Transaction to effectuate the repurchase and to repay BofA in full (see Note C). In connection with this debt restructuring, Commonwealth received an advisory fee of $0.5 million, which was expensed immediately as a reduction of the gain on liability restructuring (see Note C). After considering the repayment of BofA, and the payment of fees and expenses, the Company received net proceeds of approximately $2.7 million (excluding the Second Closing), which will be used for working capital purposes.

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Prior to these transactions, the Company had 9,204,824 shares of common stock issued and outstanding, and 30,000,000 shares were authorized pursuant to its Restated Certificate of Incorporation. On August 26, 2002, the Company obtained shareholder approval to increase the amount of authorized common stock under its Restated Certificate of Incorporation to 150 million. ComVest owns approximately 61% of the Company’s common stock and is the holder of a Placement Note in the amount of $3,166,750. Michael S. Falk, Keith Rosenbloom and Travis Lee Provow, each of whom is a director of the Company, are managers of ComVest. Michael S. Falk is Chairman and Chief Executive Officer of Commonwealth. Commonwealth is an affiliate of ComVest and the placement agent (the “Placement Agent”) for the Private Placement and the Winfield Transaction. Keith Rosenbloom, Harold Blue, T. Lee Provow and Michael S. Falk are directors of Commonwealth Associates Management Company, Inc., which is the general partner of the Placement Agent. Michael S. Falk, T. Lee Provow, and Keith Rosenbloom are also directors of Comdial. Nickolas A. Branica, the Company’s chief executive officer and a director, beneficially owns approximately 15% of the Company’s common stock and is the holder of a Placement Note in the amount of $433,350.

As a result of its immediate convertibility into shares of common stock, the issuance of the Bridge Notes required shareholder approval under the corporate governance requirements of Nasdaq’s Marketplace Rules. The failure to obtain shareholder approval prior to the issuance of the Bridge Notes resulted in the Company’s shares being delisted from the Nasdaq SmallCap Market®. The Company is attempting to have its common stock quoted on the NASD’s OTC-BB. NASDAQ determined that the Company was not eligible for immediate listing on the OTC-BB because part of the delisting order related to public interest concerns. As of September 30, 2002, the Company’s stock trades on the “pink-sheets.” The application to be quoted on the OTC-BB must be filed by one or more broker-dealers and the Company must meet certain requirements, including that its filings under the Exchange Act must be current. Certain broker-dealers have applied with the NASD to have the Company’s common stock quoted on NASD’s OTC-BB; however, to date, the Company has not been granted the right to be quoted on the OTC-BB. There can be no assurance that the Company’s stock will be quoted on the NASD’s OTC-BB in the future, in which case the Company’s stock will continue to trade through the pink-sheets.

NOTE C.      DEBT RESTRUCTURING

In the first quarter of 2002, the Company reached agreements with certain vendors and other creditors to forgive $3.8 million in current non-bank obligations, net of fees payable to the debt management firm that the Company hired to assist with these efforts. These liabilities included amounts owed to a former distributor of the Company’s products, several component parts suppliers and a seller of industrial equipment. The gains on forgiveness of $1.8 million were recognized during the three months ended March 31, 2002 and are reported as miscellaneous income in the accompanying consolidated statements of operations. Additional agreements with vendors were made during the third quarter and the related gains on forgiveness of $0.2 million are reported as miscellaneous income in the accompanying consolidated statements of operations.

In July 2000, the Company froze its non-qualified pension plan, the Retirement Benefit Restoration Plan (the “Plan”), thereby eliminating any further benefit accrual by employees in the Plan. During the first quarter of 2002, the Company reached separate agreements (the “Agreements”) with the three former executives of the Company who still had vested benefits under the Plan. The Agreements provide for aggregate monthly payments of $3,750 beginning in May 2002 and continuing for 36 months for a total of $0.1 million, with the remaining aggregate balance of $0.4 million to be paid in a lump sum in June 2005, for a total aggregate payout of $0.5 million. The Agreements settled all remaining liabilities of the Company pursuant to the Plan, thus the Company terminated the Plan and recognized a gain of $1.1 million, which is included as miscellaneous income in the accompanying consolidated statements of operations for the nine months ended September 30, 2002.

Included in the non-bank obligations reduction in the first quarter of 2002 is $2.1 million related to a promissory note that was canceled by a supplier upon Comdial returning the original inventory purchased from the supplier. Upon return of the inventory, Comdial entered into a purchase commitment with the supplier to repurchase the inventory by January 2007, with a minimum monthly purchase amount of $25,000. No gain or loss was recognized on this transaction. As of September 30, 2002, the Company had sufficient purchase orders in process to meet its minimum commitment. Also included in the non-bank obligations reduction is $0.5 million related to a supplier canceling the amount owed by Comdial in exchange for a purchase commitment of $0.8 million for product that Comdial must purchase by December 2002. As of September 30, 2002, the Company had purchase orders in process to fulfill the commitment.

On March 21, 2002, the Company and Relational Funding Corporation and its assignees (collectively “RFC”) reached agreement to reduce the total payments due under the operating and capital leases from a combined balance of approximately $5.5 million to a payout schedule over 72 months totaling approximately $2.2 million. For the first 30 months, the monthly payment is $39,621, which then reduces to $25,282. As a result of this lease restructuring, leases which were previously classified as operating became capital leases for accounting purposes. Based on the new agreement, the Company recognized a gain of $2.8 million during the first quarter of 2002, which is included in miscellaneous income in the accompanying consolidated statements of

8

operations. In addition, Comdial agreed to provide warrants to RFC to purchase 175,000 shares of the common stock of the Company for $0.61 per share, which warrants had an estimated fair market value of approximately $0.1 million.

On March 6, 2002, Comdial and Bank of America entered into the First Amendment to the Amended and Restated Credit Agreement (the “First Amendment”). In connection with the First Amendment, $10 million of outstanding debt of Comdial to Bank of America was converted into Series B Alternate Rate Cumulative Convertible Redeemable Preferred Stock, par value $10 per share (the “Preferred Stock”). Comdial issued 1,000,000 shares of the Preferred Stock to Bank of America. The Preferred Stock could be converted at any time on a 1 to 1.5 ratio into a maximum of 1.5 million shares of Comdial common stock. This conversion ratio varied if the Company received additional debt or equity, under circumstances defined in the agreement. The conversion ratio would be reduced to as low as 1 to 0.5, or 500,000 shares of common stock in the event Comdial elected to pay down the term note by up to $3 million in connection with new investment into the Company by an outside investor. Comdial had a call option allowing it to buy out Bank of America’s Preferred Stock at par value, but Bank of America had no mandatory redemption. The Preferred Stock had a 5 percent cumulative annual dividend if paid with cash ($0.5 million per year) or 10 percent if paid in common stock, at the election of Comdial. Dividends were being accrued at the 5% rate beginning on the date of issuance. The shares of common stock issuable to Bank of America upon conversion of the Preferred Stock and as payment of dividends were subject to certain demand and piggyback registration rights pursuant to a registration rights agreement, which would require the Company to register such shares of common stock for resale in the public market upon request. This conversion of bank debt to Preferred Stock resulted in a gain of $9.0 million since the fair value of the Preferred Stock issued was approximately $1.0 million, based on the Black Scholes and discounted cash flow models. The Preferred Stock was issued below par and the difference was recorded as a reduction of paid-in capital. As previously reported, ComVest entered into an agreement with Bank of America to purchase the senior secured debt position held by Bank of America in the Company and 1 million shares of the Company’s Series B Alternate Rate Preferred Stock (having a liquidation value of $10 million). Pursuant to such agreement, ComVest had the right to purchase for an aggregate of $6.5 million, the approximate $12.7 million in outstanding indebtedness owed by the Company to Bank of America and the 1 million shares of Preferred Stock. Contemporaneously with the closing of the Private Placement and the Winfield Transaction in September 2002, ComVest assigned its right to purchase the debt and the Preferred Stock to the Company, and the Company used $6.5 million of the proceeds of the Private Placement and the Winfield Transaction to effectuate the repurchase and to repay Bank of America in full. The full amount of $6.5 million paid to Bank of America was accounted for as payment of the $12.7 million debt with no proceeds considered attributable to the redemption of the Preferred Stock. In connection with this debt restructuring, Commonwealth received an advisory fee of $0.5 million. The net gain on the buy-out of Bank of America is approximately $5.9 million and is included as miscellaneous income in the accompanying consolidated statement of operations. The Preferred Stock continues to be authorized with the same terms as prior to the payoff.

In addition, Comvest deposited $1.5 million to secure two outstanding letters of credit previously issued by Bank of America (“BofA”) to the Company, and entered into a pledge agreement (the “Pledge Agreement”) with BofA concerning the disposition of the deposited funds. As security for the deposit, the Company entered into a reimbursement agreement (the “Reimbursement Agreement”) with ComVest, and issued a revolving note (the “Revolving Note”) to ComVest in the amount of the deposit. On October 25, 2002, ComVest and the Company entered into an amendment to the Reimbursement Agreement (the “Amendment”). Pursuant to the Amendment the Company paid $1.5 million to ComVest and ComVest issued a letter of direction to BofA directing BofA to pay to the Company any amounts payable to ComVest pursuant to the Pledge Agreement. In addition, the Revolving Note was canceled.

During the second quarter of 2002, the Company terminated certain health care and life insurance benefits for retired employees and recognized a gain of $0.7 million, which is included as miscellaneous income in the accompanying consolidated statements of operations.

NOTE D.      SALE/LEASEBACK OF MANUFACTURING FACILITY

In March 2001, the Company sold its Charlottesville, Virginia headquarters and manufacturing facility. The purchase price for the property was $11.4 million, all of which was collected in 2001. The Company has been leasing back a portion of the facility through August 30, 2003, for manufacturing, engineering and technical services functions. In June 2002, the Company renegotiated the lease, as the manufacturing space was no longer being utilized as the Company completed its transition to fully outsourcing all of its manufacturing operations. Under the amended lease, the Company has reduced the portion of the facility being leased from approximately 120,000 square feet to approximately 26,000 square feet, effective August 1, 2002, and has reduced the remaining lease payment obligation from $1.0 million to $0.3 million for the period August 1, 2002 through August 30, 2003.

The total gain on the sale of the facility amounted to $5.1 million. The Company immediately recognized a gain of $2.9 million in 2001, which is the amount by which the gain exceeds the present value of the minimum lease payments to be made by the Company from the closing date through August 30, 2003. The remaining amount of the gain of $2.2 million has been deferred due to the leaseback and is being amortized over three years, the term of the lease, as a reduction of rent expense. For the three and nine months ended September 30, 2002, the Company amortized

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$0.2 million and $0.5 million, respectively, as a reduction of rent expense. As of September 30, 2002, the balance of the deferred gain amounts to $0.6 million.

NOTE E.      SALE OF ARRAY ASSETS

In March 2000, the Company entered into a Strategic Alliance agreement with ePHONE Telecom, Inc. (“ePHONE”) related to the business of its wholly owned subsidiary, Array Telecom Corporation. Pursuant to the agreement, the Company sold certain fixed assets and products, and provided a license in certain intellectual property for a five-year term to ePHONE. The agreement also allowed ePHONE to utilize the name “Array” and provided ePHONE with access to its distribution channels. ePHONE paid Array on the closing date $2.7 million in cash and is required to pay royalty fees to the Company based on certain gross sales over a five-year period. The Company had been recognizing the gain of $1.9 million into income over a five-year period from the date of closing. Due to ePHONE filing for arbitration against the Company on October 2, 2001 and the subsequent termination of the agreement (see Note K), Comdial had ceased to recognize any amortization of the deferred gain as of September 30, 2001. However, during August 2002, the American Arbitration Association issued an award in favor of the Company requiring ePHONE to pay the Company $1.7 million; therefore, the deferred gain of $1.3 million was recognized during the third quarter of 2002 and is included as miscellaneous income in the accompanying consolidated statements of operations. Because the Company had significant uncertainties about the collectibility of the $1.7 million award from ePHONE, none of this award amount has been recognized as income in the financial statements for the three months ended September 30, 2002. On November 13, 2002, the Company entered into a settlement agreement with ePHONE in which the Company agreed to accept $1.6 million in full satisfaction of the amounts owned by ePHONE pursuant to the award. On November 13, 2002, ePHONE made an initial $1.0 million payment under the settlement, and the remaining $0.6 million is due on or before November 20, 2002; however, there can be no assurance this remaining amount will be received. In the event ePHONE fails to make timely payment of the remaining amount, Comdial shall be entitled to collect from ePHONE the full amount due pursuant to the award, plus certain costs and attorneys’ fees, less the aggregate amount that ePHONE has paid pursuant to the settlement agreement. The $1.0 million payment received on November 13, 2002 will be included as miscellaneous income in the fourth quarter of 2002.

NOTE F.      INVENTORIES

Inventories consist of the following:

In thousands	September 30, 2002		December 31, 2001
Finished goods	$	3,700	$	5,040
Materials and supplies		552		4,487
Total	$	4,252	$	9,527

The Company provides reserves to cover product obsolescence and those reserves impact gross margins. Such reserves are dependent on management’s estimates of the recoverability of costs of all inventory, which is based on, among other things, expected obsolescence of the products. Raw material obsolescence is mitigated by the commonality of component parts and finished goods and by the low level of inventory relative to sales. Also included in inventory is the estimated amount for returns not yet received as of September 30, 2002 and December 31, 2001, which totaled $0.2 million and $0.1 million, respectively.

NOTE G.      LONG - TERM DEBT

Long-term debt consists of the following:

In thousands	September 30, 2002		December 31, 2001
Revolver (1)	$	—	$	16,500
Term Loan (1)		—		6,404
Capital Leases (2)		1,905		3,578
Notes Payable (3)		256		947
Promissory Note (4)		—		2,079
Private Placement Notes (5)		12,542		—
Private Placement Senior Notes (6)		2,000		—
Total Debt		16,703		29,508
Less current maturities on debt		732		2,596
Total long-term debt	$	15,971	$	26,912

(1) As previously reported, ComVest entered into an agreement with Bank of America to purchase the senior secured debt position held by Bank of America in the Company and 1 million shares of the Company’s Series B Alternate Rate Preferred Stock (having a liquidation value of $10 million). Pursuant to such agreement, ComVest had the right to purchase for an aggregate of $6.5 million, the approximate $12.7 million in outstanding indebtedness owed by the Company to Bank of America and the 1 million shares of Preferred Stock. Contemporaneously with the closing of the Private Placement and the Winfield Transaction (see Note B), ComVest assigned its right to purchase the debt and the Preferred Stock to the Company, and the Company used $6.5 million of the proceeds of the Private Placement and the Winfield Transaction to effectuate the repurchase and to repay Bank of America in full. The full amount of $6.5

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	million paid to Bank of America was allocated as payment of the $12.7 million debt outstanding as of September 27, 2002. In connection with this debt restructuring, Commonwealth received an advisory fee of $0.5 million. The net gain on the buy-out of Bank of America is approximately $5.9 million and is included as miscellaneous income in the accompanying consolidated statement of operations.
(2)	The Company has a Master Lease Agreement with Relational Funding Corporation and its assignees (collectively “RFC”). This agreement covers certain leases related to an abandoned software implementation and hardware for internal use. On March 21, 2002, the Company and RFC reached agreement to reduce the total payments due under the operating and capital leases from a combined balance of approximately $5.5 million to a payout schedule over 72 months totaling approximately $2.3 million. For the first 30 months, the monthly payment is $39,621, which then reduces to $25,282. As a result of this lease restructuring, leases which were previously classified as operating became capital leases for accounting purposes. Based on the new agreement, the Company recognized a gain of $2.8 million during the first quarter of 2002, which is included in miscellaneous income in the accompanying consolidated statements of operations. In addition, Comdial agreed to provide RFC warrants to purchase 175,000 shares of the common stock of the Company for $0.61 per share, which had an estimated fair market value of approximately $0.1 million at the date of grant.
(3)	The Company had unsecured notes payable in the amount of $0.9 million outstanding as of December 31, 2001. In March 2002, the notes were renegotiated to an outstanding balance of $0.1 million (see Note C), of which the balance remaining is $62,000 and is payable in monthly installments of approximately $12,500. In August 2002, the Company signed an unsecured note payable of $0.3 million with one of its suppliers. The balance as of September 30, 2002 is $0.2 million and is payable in monthly installments of $12,500 from October 2002 through February 2003 and $19,829 from March 2003 through August 2003. The note bears no interest.
(4)	On October 12, 2001, the Company signed a promissory note with one of its suppliers that converted $2.1 million in accounts payable owed to the supplier to a long-term note. In February 2002, this note was canceled. See Note C.
(5)	As described in Note B above, on June 21, 2002, Comdial completed a private placement by issuing 7% senior subordinated secured convertible promissory notes (the “Bridge Notes”) in the aggregate principal amount of $2,250,000, pursuant to Subscription Agreements (the “Subscription Agreements”) which provided for up to $4 million of bridge financing to the Company (the “Bridge Financing”). During the third quarter of 2002, additional proceeds of $1,750,000 were received to complete the Bridge Financing. Under the terms of the Bridge Financing, the purchasers had the right to convert 13.33% of the principal amount of their respective Bridge Notes (a total of $533,200) into shares of common stock at a conversion price of $0.01 per share. Because the Bridge Notes were convertible at a price less than the market price on the closing dates, they contain a beneficial conversion feature. Based on the stock prices on the various closing dates, the amounts attributed to the feature were recorded as additional paid-in capital. The debt discount ($2.3 million for the Bridge Notes issued on June 21, 2002 and $1.3 million for the Bridge Notes issued during the third quarter of 2003) was being accreted over the term of the debt, using the effective yield method. Due to the conversion of the Bridge Notes described below, the remaining debt discount was accreted as of the conversion date of September 27, 2002. This accretion of $3.5 million and $0.1 million for the three and nine months ended September 30, 2002, respectively, is included in interest expense.
	On or prior to September 27, 2002, each of the holders of the Bridge Notes exercised their right to convert 13.33% of the principal amount of the Bridge Notes (a total of $533,200) into shares of common stock at a conversion price of $0.01 per share. The Company issued an aggregate of 53,320,000 shares pursuant to such conversions.

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	On September 27, 2002, the Company consummated a closing of approximately $12.6 million under a private placement (the “Private Placement”). This includes the conversion of the remaining Bridge Notes of approximately $3.5 million. The Private Placement consisted of 7% subordinated secured convertible promissory notes (the “Placement Notes”) and warrants to purchase an aggregate of approximately 62.7 million shares of the Company’s common stock at an exercise price of $0.01 per share (the “Placement Warrants”). The Placement Warrants, which were valued at $3.1 million using the Black Scholes method, were recorded as deferred financing costs. An aggregate of 12.5 million of the Placement Warrants are subject to forfeiture, on a pro rata basis, if the Placement Notes are repaid during the first eighteen months following their issuance. The Placement Notes may in the future be convertible under certain circumstances at the option of the Company if the common stock of the Company trades at or above $1.00 for 20 consecutive trading days. The initial conversion price of the Placement Notes is $0.33 per share. The conversion price of the Placement Notes is subject to downward adjustment in the event of certain defaults. In addition, the common stock underlying the Placement Notes and the Placement Warrants are subject to certain registration rights.
	On October 29, 2002, the Company conducted a second and final closing (the “Second Closing”) under the Private Placement. The Second Closing included the issuance of $775,000 aggregate principal amount of 7% Notes, and 3,875,000 Placement Warrants. Of the Placement Warrants issued under the Second Closing, 775,000 are subject to forfeiture, on a pro rata basis, as described above.
	The Placement Notes mature on the earlier of September 27, 2005 or the occurrence of certain events. The maturity date may be extended by the Company for up to one year. If the Company exercises its right to extend the maturity date, the interest rate will be adjusted to 12% from the original maturity date until repayment. The Placement Notes are secured by a second lien (subordinated to the first lien of Winfield Capital Corp.) on substantially all of the Company’s assets.
(6)	As described in Note B above, on September 27, 2002, the Company consummated a private placement with Winfield Capital Corp. of $2.0 million (the “Winfield Transaction”). The Winfield Transaction consisted of 12% subordinated secured convertible promissory notes (the “Winfield Notes”) and warrants to purchase 5.5 million shares of common stock at an exercise price of $0.01 per share (the “Winfield Warrants”). The Winfield Warrants, which were valued at $0.3 million using the Black Scholes method, were recorded as deferred financing costs. The Winfield Notes are convertible on the same terms and subject to the same conditions as the Placement Notes [see (5) above] and mature on the earlier of September 27, 2005 or the occurrence of certain events. The maturity date may be extended by the Company for up to one year. If the Company exercises its right to extend the maturity date, the interest rate will be adjusted to 17% from the original maturity date until repayment. The Winfield Notes are senior in right of payment and security to the Placement Notes, and the underlying shares of common stock are subject to certain registration rights.

NOTE H.      POST-RETIREMENT OBLIGATIONS

The Company has a qualified pension plan that provides benefits based on years of service and an employee’s compensation during the employment period. In September, 2000, the Company froze the plan, thereby eliminating any further benefit accrual by employees. Assets of the plan are generally invested in equities and fixed income instruments.

On December 31, 2001, the market value of the plan assets exceeded projected benefit obligations (calculated using a discount rate of 7.25%) by $1.3 million. Based on preliminary projected benefit obligations, assuming the same discount rate as in 2001, but without a full actuarial update for 2002, and further assuming that asset values as of November 1, 2002 stay the same through the end of 2002, the Company estimates that the pension plan will be underfunded by approximately $4.5 million as of December 31, 2002. If the full-year 2002 investment return remains the same and there are no other changes, then the Company will have to record a liability and related other comprehensive loss item (which is a direct decrease in equity) on the balance sheet of approximately $7.0 million. If the Company’s investment return and other actuarial assumptions remain unchanged, no contributions are projected to be required through 2003.

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NOTE I.      EARNINGS (LOSS) PER SHARE

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

Unexercised options to purchase 3,448,265 and 1,129,533 shares of common stock and warrants to purchase 80,109,102 and 0 shares of common stock for the three months ended September 30, 2002 and 2001, respectively, were not included in the computations of diluted loss per share because assumed exercise would be anti-dilutive. Unexercised options to purchase 3,097,335 and 1,129,533 shares of common stock and warrants to purchase 175,000 and 0 shares of common stock for the nine months ended September 30, 2002 and 2001, respectively, were not included in the computations of diluted loss per share because assumed exercise would be anti-dilutive.

The following table discloses the quarterly information for the three and nine months ended September 30, 2002 and 2001.

	Three Months Ended						Nine Months Ended
In thousands, except per share data	September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
Basic:
Net income (loss) applicable to all shareholders		($2,128	)		($2,997	)	$	7,955			($6,855	)
Preferred stock dividend		(125	)		—			(284	)		—
Gain on redemption of preferred stock		1,000			—			1,000			—
Net income (loss) applicable to common stock		($1,253	)		($2,997	)	$	8,671			($6,855	)
Weighted average number of common shares     outstanding during the period		25,907			9,205			14,739			9,200
Add - Deferred shares		10			10			10			10
Weighted average number of shares used in     calculation of basic earnings per common share		25,917			9,215			14,749			9,210
Earnings (loss) per share before preferred stock     dividend		($0.08	)		($0.33	)		0.54			($0.74	)
Preferred stock dividend		(0.01	)		—			(0.02	)		—
Gain on redemption of preferred stock		0.04			—			0.07			—
Earnings (loss) per share applicable to common        stock		($0.05	)		($0.33	)	$	0.59			($0.74	)
Diluted:
Net income (loss) applicable to all shareholders		($2,128	)		($2,997	)	$	7,955			($6,855	)
Preferred stock dividends		(125	)		—			(284	)		—
Gain on redemption of preferred stock		1,000			—			1,000			—
Net income (loss) applicable to common stock		($1,253	)		($2,997	)	$	8,671			($6,855	)
Weighted average number of shares used in     calculation of basic earnings per common share		25,917			9,215			14,749			9,210
Effect of dilutive stock options		—			—			25			—
Effect of dilutive warrants		—			—			1,933			—
Weighted average number of shares used in        calculation of diluted earnings per common        share		25,917			9,215			16,707			9,210
Earnings (loss) per share before preferred stock     dividend		($0.08	)		($0.33	)		0.48			($0.74	)
Preferred stock dividend		(0.01	)		—			(0.02	)		—
Gain on redemption of preferred stock		0.04			—			0.06			—
Earnings (loss) per share applicable to common        stock		($0.05	)		($0.33	)	$	0.52			($0.74	)

During the nine months ended September 30, 2002 and 2001, no stock options were exercised.

NOTE J.      SEGMENT INFORMATION

During the first nine months of 2002 and 2001, substantially all of the Company’s sales, net income, and identifiable net assets were attributable to the telecommunications industry with over 98% of sales occurring in the United States.

The Company organizes its product segments to correspond with the industry background of primary business and product offerings which fall into three categories: (1) voice switching systems for small to mid-size businesses, (2) voice messaging systems, and (3) computer telephony integration (“CTI”) applications and other. Each of these categories is considered a business segment, and with respect to their financial performance, the costs associated with these segments can only be quantified and identified to the gross profit level for each segment. These three product segments comprise substantially all of Comdial’s sales to the telecommunications market.

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

The following tables show segment information for the nine months ended September 30, 2002 and 2001.

(In thousands)	September 30, 2002		September 30, 2001
Business Segment Net Sales
Switching	$	26,257	$	41,774
Messaging		10,251		11,631
CTI & Other		1,256		7,853
Net sales	$	37,764	$	61,258

(In thousands)	September 30, 2002			September 30, 2001
Business Segment Profit
Switching	$	8,563		$	13,361
Messaging		3,935			6,940
CTI & Other		(79	)		2,757
Gross profit		12,419			23,058
Operating expenses		20,142			29,648
Interest expense, net		6,984			2,119
Loss (gain) on sale of assets		417			(2,099	)
Miscellaneous (income) expense, net		(23,079	)		245
Income (loss) before income taxes	$	7,955			($6,855	)

NOTE K.      COMMITMENTS AND CONTINGENT LIABILITIES

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

On March 5, 2001, William Grover, formerly a senior vice president of Comdial, filed suit in state court in Charlottesville, Virginia alleging breach of an employment contract and defamation, and seeking compensatory, punitive and exemplary damages in the total amount of $1.9 million, plus interest. Among other things, Mr. Grover claims that the for-cause termination of his employment was unjustified and that he is therefore entitled to all benefits accrued to him pursuant to the Company’s executive retirement plan. The Company removed this case to the federal district court for the Western District of Virginia, because Mr. Grover’s state law claims against Comdial are preempted by federal law, specifically ERISA. However, the district court granted Mr. Grover’s motion to remand the case back to state court. The case has not yet been scheduled for trial. Comdial believes it has adequate substantive and procedural defenses against all claims made against Comdial in this matter and no amounts have been accrued.

On October 2, 2001, ePHONE Telecom, Inc. (“ePHONE”) filed for arbitration against Comdial in Washington, DC, alleging fraud in the inducement, among other things, arising from the alleged breach of an exclusive license agreement. ePHONE was seeking rescission of the agreement and a return of the full amount of $2.7 million paid to Comdial thereunder, as well as compensatory and punitive damages totaling an additional $10.0 million. Comdial filed counterclaims against ePHONE for an amount in excess of $2.0 million based on ePHONE’s failure to make minimum royalty payments due under the agreement and for loss of future revenues based on ePHONE’s breach of the agreement and the resulting termination thereof. On August 27, 2002, the American Arbitration Association (the “AAA”) issued an award in favor of the Company. The AAA denied all claims made in the arbitration by ePHONE and ordered ePHONE to pay the Company approximately $1.7 million on the Company’s counterclaim. In addition, the AAA ruled that ePHONE is responsible for payment of all of the administrative fees and expenses of the AAA, plus the compensation of the three arbitrators who presided over the arbitration and must reimburse the Company approximately $38,000 in fees previously advanced to the AAA by the Company. On November 1, 2002, the state

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court in Alexandria, Virginia confirmed the award upon a motion by the Company. Because the Company had significant uncertainties about the collectibility of the $1.7 million award from ePHONE, none of this award amount has been recognized as income in the financial statements for the three months ended September 30, 2002. On November 13, 2002, the Company entered into a settlement agreement with ePHONE in which the Company agreed to accept $1.6 million in full satisfaction of the amounts owed by ePHONE pursuant to the award. On November 13, 2002, ePHONE made an initial $1.0 million payment under the settlement, and the remaining $0.6 million is due on or before November 20, 2002; however there can be no assurance this remaining amount will be received. In the event ePHONE fails to make timely payment of the remaining amount, Comdial shall be entitled to collect from ePHONE the full amount due pursuant to the award, plus certain costs and attorneys’ fees, less the aggregate amount that ePHONE has paid pursuant to the settlement agreement.

In June 2002, the Company agreed to settle a previously reported lawsuit filed against Comdial and a second defendant, Barron Communications, Inc., by Baisch & Skinner, Inc. (“Baisch”) in St. Louis County, Missouri. The Company agreed to pay Baisch $26,000 in three installments as its part of the settlement. The final installment payment was due and paid on August 9, 2002.

On October 5, 2000, William G. Mustain resigned as president and chief executive officer of Comdial. On the same date, Comdial agreed to pay Mr. Mustain his normal salary for the remainder of 2000 plus severance in the amount of $0.1 million per year for three years beginning on January 1, 2001. Mr. Mustain was also entitled to be paid approximately $1.7 million in three installments over a 15-month period plus certain fringe benefits under Comdial’s Retirement Benefit Restoration Plan (the “Plan”). In 2001, Comdial made the initial payment of $0.6 million under the Plan. However, on June 30, 2001, Comdial notified Mr. Mustain that it would not make payment of the second $0.6 million installment due under the Plan because of its financial condition, as permitted under the terms of the agreement with Mr. Mustain. On December 27, 2001, Comdial reached agreement with Mr. Mustain on modified terms with respect to the remaining amounts due to him. In lieu of those remaining amounts due of $1.1 million, Comdial agreed to pay Mr. Mustain a total of approximately $0.3 million, payable in five annual installments commencing in 2004. No gain was recognized until the Plan was liquidated in the first quarter of 2002, when $1.1 million was recognized as part of the overall plan liquidation also described in Note C. Comdial also agreed to continue to pay Mr. Mustain the aforementioned severance pay through the three-year severance period that expires on December 31, 2003. All amounts due Mr. Mustain have been accrued as of September 30, 2002.

On November 2, 2001, Comdial reached a settlement of a lawsuit filed against the Company by Rates Technology Inc. (“RTI”) in the Eastern District of New York alleging that certain of its products had infringed an expired patent held by RTI. The specific financial terms of the settlement are confidential, but are not material to the Company’s statement of operations. The settlement was paid in full in the first quarter of 2002.

On August 12, 2002, Rates Technology Inc. (“RTI”) filed suit against the Company in the U.S. District Court for the Eastern District of New York alleging patent infringement and breach of contract. On August 22, 2002, the Company reached a settlement with RTI and the amount was paid in full during the third quarter of 2002. The specific financial terms of the settlement are confidential, but are not material to the Company’s statement of operations.

NOTE L.      RESTRUCTURING

In 2000, due to declining market conditions, unfavorable economic factors, uncompetitive product costs, and excess inventory levels, the Board of Directors and management deemed it necessary to develop a plan to restructure the Company. This plan was approved by the Board of Directors, and implementation commenced during the fourth quarter of 2000. On September 28, 2001, as a result of the downturn in the economy and the events of September 11, 2001, management and the Board approved and executed a second restructuring plan. During November 2001, a third restructuring plan was announced. Reductions were made across several departments, including sales, finance, manufacturing, engineering, and technical support. As of June 30, 2002, the exit plans were complete and a total of approximately 480 employees have been terminated.

As of December 31, 2001, the Company had a remaining obligation of $0.5 million relating to the 2000 and 2001 restructurings. During the three and nine months ended September 30, 2002, the Company made cash severance payments of $0 and $0.5 million, respectively. As of September 30, 2002, the Company had no remaining obligation related to the 2000 and 2001 restructurings.

NOTE M.      RECENT PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. Goodwill and other indefinite lived intangible assets will be tested for impairment, and any impairment charge resulting from the initial application of SFAS No. 142 would be classified as a cumulative change in accounting principle. SFAS No. 142 is effective for companies with fiscal years beginning after December 15, 2001.

In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective December 31, 2001. In addition, the Company completed the transitional impairment test and determined that goodwill was not impaired. A reconciliation of previously reported net loss and loss per share for the three and nine months ended September 30, 2001, to the amounts adjusted for the exclusion of amortization net of the related income tax effect follows:

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	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share amounts)	2002			2001			2002		2001
Reported net income (loss)		($2,128	)		($2,997	)	$	7,955		($6,855	)
Add: Goodwill amortization, net of tax		—			423			—		1,518
Adjusted net income (loss)		($2,128	)		($2,574	)	$	7,955		($5,337	)
Basic earnings (loss) per share:
Reported net income (loss)		($0.08	)		($0.33	)	$	0.54		($0.74	)
Goodwill amortization, net of tax		—			0.05			—		0.16
Adjusted net income (loss) per share - basic		($0.08	)		($0.28	)	$	0.54		($0.58	)
Diluted earnings (loss) per share:
Reported net income (loss)		($0.08	)		($0.33	)	$	0.48		($0.74	)
Goodwill amortization, net of tax		—			0.05			—		0.16
Adjusted net income (loss) per share - diluted		($0.08	)		($0.28	)	$	0.48		($0.58	)

During the first quarter of 2002, the Company adopted Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (“SFAS No. 144”). The adoption of SFAS No. 144 had no impact on the Company’s operations.

During the second quarter of 2002, the Company early adopted Financial Accounting Standards Board Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). SFAS No. 145 requires any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board Statement No. 30, Reporting the Results of Operations, for classification as an extraordinary item to be reclassified. Accordingly, the extraordinary gain of $11.9 million that was reported during the first quarter of 2002 has been reclassified and is included in miscellaneous income in the accompanying financial statements.

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COMDIAL CORPORATION AND SUBSIDIARIES

ITEM 2.    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 condensed consolidated financial statements and accompanying notes continued herein. This analysis attempts to identify trends and material changes that occurred during the periods presented.

In 2000, due to declining market conditions, unfavorable economic factors, uncompetitive product costs, and excess inventory levels, the Board of Directors and management deemed it necessary to develop a plan to restructure the Company. This plan was approved by the Board of Directors, and implementation commenced during the fourth quarter of 2000. On September 28, 2001, as a result of the downturn in the economy and the events of September 11, 2001, management and the Board approved and executed a second restructuring plan. During November 2001, a third restructuring plan was announced. Reductions were made across several departments, including sales, finance, manufacturing, engineering, and technical support. As of June 30, 2002, the exit plans were complete and a total of approximately 480 employees have been terminated.

Comdial is a Delaware corporation based in Sarasota, Florida.

Recent Developments

Bridge Financing

As previously disclosed in the Company’s Reports on Form 8-K dated July 5, 2002, July 24, 2002, August 27, 2002, September 20, 2002 and October 2, 2002, the Company conducted closings on its private placement of 7% senior subordinated secured convertible promissor–y notes (the “Bridge Notes”) in the aggregate principal amount of $4,000,000 (the “Bridge Financing”). Net proceeds from the Bridge Financing after payment of legal, accounting and related expenses were approximately $3,470,000. The board of directors obtained a fairness opinion from the investment banking firm of Raymond James & Associates, Inc. in connection with the Bridge Financing.

On or prior to September 27, 2002, each of the holders of the Bridge Notes exercised their right to convert 13.33% of the principal amount of the Bridge Notes into shares of common stock at a conversion price of $0.01 per share. The Company issued an aggregate of 53,320,000 shares pursuant to such conversions.

Private Placement

On September 27, 2002, the Company consummated a closing of approximately $12.6 million under a private placement (the “Private Placement”). This includes the conversion of the remaining Bridge Notes of approximately $3.5 million. The Private Placement consisted of 7% subordinated secured convertible promissory notes (the “Placement Notes”) and warrants to purchase an aggregate of approximately 62.7 million shares of the Company’s common stock at an exercise price of $0.01 per share (the “Placement Warrants”). An aggregate of 12.5 million of the Placement Warrants are subject to forfeiture, on a pro rata basis, if the Placement Notes are repaid during the first eighteen months following their issuance. The Placement Notes may in the future be convertible under certain circumstances at the option of the Company if the common stock of the Company trades at or above $1.00 for 20 consecutive trading days. The initial conversion price of the Placement Notes is $0.33 per share. The conversion price of the Placement Notes is subject to downward adjustment in the event of certain defaults. In addition, the common stock underlying the Placement Notes and the Placement Warrants are subject to certain registration rights.

On October 29, 2002, the Company conducted a second and final closing (the “Second Closing”) under the Private Placement. The Second Closing included the issuance of $775,000 aggregate principal amount of 7% Notes, and 3,875,000 Placement Warrants. Of the Placement Warrants issued under the Second Closing, 775,000 are subject to forfeiture, on a pro rata basis, as described above.

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The Company received $775,000 in new investments from the Second Closing. In connection with the Second Closing, Commonwealth Associates, L.P. (“Commonwealth”) received a 7% placement fee equaling approximately $55,000 and approximately $44,000 in expenses. Pursuant to the terms of the previously disclosed placement agency agreement between the Company and Commonwealth, the Company issued warrants to Commonwealth to acquire 387,500 shares of common stock at an exercise price of $0.01 per share. The net proceeds of the Second Closing were approximately $662,000, which will be used for working capital purposes.

Winfield Transaction

Also on September 27, 2002, the Company consummated a private placement with Winfield Capital Corp. of $2.0 million (the “Winfield Transaction”). The Winfield Transaction consisted of 12% subordinated secured convertible promissory notes (the “Winfield Notes”) and warrants to purchase 5.5 million shares of common stock at an exercise price of $0.01 per share (the “Winfield Warrants”). The Winfield Notes are convertible on the same terms and subject to the same conditions as the Placement Notes. The Winfield Notes are senior in right of payment and security to the Placement Notes, and the underlying shares of common stock are subject to certain registration rights.

The Company received approximately $11.1 million in new investments in the Private Placement and the Winfield Transaction. In connection with the Private Placement (including the conversion of the Bridge Notes) and the Winfield Transaction, Commonwealth received a 7% placement fee equaling approximately $1 million and approximately $0.3 million in expenses. The net proceeds of the Private Placement and the Winfield Transaction was approximately $9.7 million.

Debt Restructuring

As previously reported, ComVest Venture Partners, L.P. (“ComVest”), an affiliate of Commonwealth, entered into an agreement with Bank of America, N.A., (“BofA”), the Company’s senior lender, to purchase the senior secured debt position held by Bank of America in the Company and 1 million shares of the Company’s Series B Alternate Rate Preferred Stock (having a liquidation value of $10 million). Pursuant to such agreement, ComVest had the right to purchase for an aggregate of $6.5 million, the approximate $12.7 million in outstanding indebtedness owed by the Company to BofA and the 1 million shares of Preferred Stock. Contemporaneously with the closing of the Private Placement and the Winfield Transaction, ComVest assigned its right to purchase the debt and the Preferred Stock to the Company, and the Company used $6.5 million of the proceeds of the Private Placement and the Winfield Transaction to effectuate the repurchase and to repay BofA in full. In connection with this debt restructuring, Commonwealth received an advisory fee of $500,000. Following the repayment of BofA, and the payment of fees and expenses, the Company received net proceeds of approximately $2.7 million, which will be used for working capital purposes.

In addition, Comvest deposited $1.5 million to secure two outstanding letters of credit previously issued by Bank of America (“BofA”) to the Company, and entered into a pledge agreement (the “Pledge Agreement”) with BofA concerning the disposition of the deposited funds. As security for the deposit, the Company entered into a reimbursement agreement (the “Reimbursement Agreement”) with ComVest, and issued a revolving note (the “Revolving Note”) to ComVest in the amount of the deposit. On October 25, 2002, ComVest and the Company entered into an amendment to the Reimbursement Agreement (the “Amendment”). Pursuant to the Amendment the Company paid $1.5 million to ComVest and ComVest issued a letter of direction to BofA directing BofA to pay to the Company any amounts payable to ComVest pursuant to the Pledge Agreement. In addition, the Revolving Note was canceled.

Advisory Agreement

As previously reported, on June 7, 2002, Comdial entered into an advisory agreement (the “Advisory Agreement”) with Commonwealth Associates, L.P. (“Commonwealth”) pursuant to which the Company engaged Commonwealth to perform financial advisory and consulting services in connection with the Bridge Financing and the restructuring of our outstanding indebtedness to our senior bank lender (the “Debt Restructuring”). Commonwealth received 250,000 shares of the Company’s common stock upon signing of the agreement (the “Advisory Shares”) and warrants (the “Advisory Warrants”) to purchase 2,257,268 shares of common stock (representing 5% of Comdial’s then outstanding fully-diluted capital stock) with an exercise price of $0.01 per share, upon the closing of the Bridge Financing on June 21, 2002. The Advisory Warrants are exercisable through June 21, 2007.

Commonwealth received additional Advisory Warrants of 1,146,934 as Comdial received additional proceeds of $1,750,000 from the Bridge Financing during the third quarter. Commonwealth also received a cash fee of $0.5 million upon completion of the Debt Restructuring, as described above.

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Pursuant to the Advisory Agreement, Commonwealth was also engaged to assist the Company in raising additional debt and/or equity securities and in securing a new senior lender. In connection with the Private Placement and the Winfield Transaction, Commonwealth received a 7% placement fee equaling approximately $1 million and approximately $0.3 million in expenses. Also as a result of the Private Placement and the Winfield Transaction, the Company issued warrants to Commonwealth to acquire 6,270,900 and 550,000 shares, respectively, of common stock at an exercise price of $0.01 per share.

The Company received $775,000 in new investments from the Second Closing on October 29, 2002. In connection with the Second Closing, Commonwealth received a 7% placement fee equaling approximately $55,000 and approximately $44,000 in expenses. The Company issued warrants to Commonwealth to acquire 387,500 shares of common stock at an exercise price of $0.01 per share.

Changes in the Board of Directors

In connection with the Bridge Financing, ComVest received the right to designate a majority of Comdial’s board of directors (the “Board”), which was then comprised of four members. ComVest initially designated Travis Lee Provow and Joseph Wynne to fill the vacancies left by the resignations of David P. Berg and Robert P. Collins. On August 13, 2002, ComVest’s third designee, Keith Rosenbloom, was appointed to the Board.

On October 3, 2002, Michael S. Falk was named to the Company’s Board of Directors, and Travis Lee Provow was named Chairman of the Board, replacing Nickolas A. Branica, the Company’s CEO who was serving as interim Chairman and who will remain on the Board as a director. On such date, Edwin W. Cooperman was appointed to be a director of the Company and Joseph P. Wynne resigned from the Board. Currently, the Board is comprised of six members, three of which were designated by ComVest.

Increase in Authorized Capital

On September 27, 2002 but effective November 7, 2002, the Board and the holders of a majority of the outstanding shares of common stock approved an increase in the Company’s authorized shares of common stock to 500,000,000 in order to reserve a sufficient number of shares to provide for conversion of the Placement Notes and the Winfield Note, assuming a minimum conversion price of $.05.

Change in Control of the Company

As a result of the issuances of securities in connection with the financings described above and the change in the majority of the members of the board of directors, there has been a change in control of the Company.

ComVest owns approximately 61% of the Company’s common stock and is the holder of a Placement Note in the amount of $3,166,750. Michael S. Falk, Keith Rosenbloom and Travis Lee Provow are managers of ComVest. Michael S. Falk is Chairman and Chief Executive Officer of Commonwealth. Commonwealth is an affiliate of ComVest and the placement agent (the “Placement Agent”) for the Private Placement and the Winfield Transaction. Keith Rosenbloom, Harold Blue, T. Lee Provow and Michael S. Falk are directors of Commonwealth Associates Management Company, Inc., which is the general partner of the Placement Agent. Michael S. Falk, T. Lee Provow, and Keith Rosenbloom are also directors of Comdial.

Nickolas A. Branica, the Company’s chief executive officer and a director, beneficially owns approximately 15% of the Company’s common stock and is the holder of a Placement Note in the amount of $433,350.

Revenue and Earnings:

Third Quarter 2002 vs. 2001

Comdial’s net sales decreased by 45% for the third quarter of 2002 to $12.5 million, compared with $22.9 million in the third quarter of 2001. The primary factors in the decrease of sales were the overall market contraction and the elimination of the Company’s Avalon product line that targeted the assisted living market. In addition, the Company experienced difficulties in fulfilling certain product orders as a result of the production transition from Virginia to the outsourcing partners plus a backlog that has been built up with one of the United States outsourcing partners. The problem is currently being addressed and is expected to be resolved during the fourth quarter. However, there is a risk that such production issues could continue.

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Gross profit decreased by 53% for the third quarter of 2002 to $3.4 million, compared with $7.3 million in the third quarter of 2001. Gross profit, as a percentage of sales, decreased from 32% for the third quarter of 2001 to 28% for the same period of 2002. During the third quarter of 2002, the Company charged $0.4 million to cost of sales for inventory obsolescence and $0.6 million to cost of sales resulting from physical inventory discrepancies.

Selling, general and administrative expenses (“SG&A”) decreased for the third quarter of 2002 by 30% to $5.0 million, compared with $7.2 million in the third quarter of 2001. This decrease primarily resulted from downsizing the work force and more closely controlling costs. SG&A expenses, as a percentage of sales, increased to 40% for the third quarter of 2002 compared with 31% for the same period of 2001. This increase primarily resulted from the decrease in net sales described above.

Engineering, research and development expenses for the third quarter of 2002 decreased by 24% to $1.2 million, compared with $1.5 million for the third quarter of 2001, primarily due to the downsizing of the work force. Engineering expenses, as a percentage of sales, increased to 9% for the third quarter of 2002 compared with 7% for the third quarter of 2001, primarily due to the decrease in net sales described above.

In connection with the Bridge Financing described in Note B, warrants to purchase 1,500,000 shares of common stock were issued to two executive officers of the Company. The warrants are exercisable at $0.01 per share until June 21, 2007. Compensation expense of $0.5 million was recorded based on the intrinsic value of the warrants on the grant date.

Interest expense increased for the third quarter of 2002 by 597% to $5.8 million, compared with $0.8 million in the third quarter of 2001. This was primarily due to the amortization of the deferred financing costs and the accretion of the discount on the bridge notes (see Note B), offset by lower levels of debt during 2002 due primarily to the March 2002 restructuring with Bank of America (see Note C).

Miscellaneous income increased to $7.0 million for the third quarter of 2002,compared with $0.1 million for the third quarter of 2001, primarily related to the gain on the extinguishment of the outstanding indebtedness owed by the Company to Bank of America and the redemption of the 1 million shares of Preferred Stock held by Bank of America (see Note C). In addition, the Company recognized a previously deferred gain on the sale of Array assets of $1.3 million (see Note E).

The net loss decreased for the third quarter of 2002 to $2.1 million, compared with a net loss of $3.0 million for the same period in 2001. This decrease was primarily attributable to lower selling, general and administrative expenses for the quarter and the increase in miscellaneous income, offset by the reduction in sales and related gross profit.

First Nine Months of 2002 vs 2001

Comdial’s net sales decreased by 38% for the first nine months of 2002 to $37.8 million, compared with $61.3 million in the first nine months of 2001. The primary factors in the decrease of sales were the overall market contraction and the elimination of the Company’s Avalon product line that targeted the assisted living market. In addition, during the second quarter of 2002, the Company experienced difficulties in fulfilling product orders as a result of production backlogs with its outsourced manufacturers. The production issues related to product quality at its Asian manufacturer that caused an inability to fulfill orders, as described in the Company’s first quarter 10-Q, have been resolved. During the third quarter of 2002, the Company experienced difficulties in fulfilling certain product orders as a result of the production transition from Virginia to the outsourcing partners plus a backlog that has been built up with one of the United States outsourcing partners. The problem is currently being addressed and is expected to be resolved during the fourth quarter. However, there is a risk that such production issues could continue.

Gross profit decreased by 46% for the first nine months of 2002 to $12.4 million, compared with $23.1 million in the first nine months of 2001 primarily due to the decrease in net sales described above. Gross profit, as a percentage of sales, decreased from 38% for the first nine months of 2001 to 33% for the same period of 2002. This decrease is primarily due to the Company initiating certain promotional pricing for its DX-80 voice mail product during the first quarter of 2002 to stimulate sales, a general lowering of prices to compete in the marketplace combined with the higher cost of the remaining in-house production that was not outsourced until July 2002. During the third quarter of 2002, the Company charged $0.4 million to cost of sales for inventory obsolescence and $0.6 million to cost of sales resulting from physical inventory discrepancies.

Selling, general and administrative expenses (“SG&A”) decreased for the first nine months of 2002 by 32% to $15.4 million, compared with $22.6 million in the first nine months of 2001. This decrease primarily resulted from downsizing the work force and more closely controlling costs. SG&A expenses, as a percentage of sales, increased to 41% for the first nine months of 2002 compared with 37% for the same period of 2001. This increase primarily resulted from the decrease in net sales described above.

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Engineering, research and development expenses for the first nine months of 2002 decreased by 19% to $4.2 million, compared with $5.2 million for the first nine months of 2001, primarily due to the downsizing of the work force. Engineering expenses, as a percentage of sales, increased to 11% for the first nine months of 2002 compared with 9% for the first nine months of 2001, primarily due to the decrease in net sales described above.

In connection with the Bridge Financing described in Note B, warrants to purchase 1,500,000 shares of common stock were issued to two executive officers of the Company. The warrants are exercisable at $0.01 per share until June 21, 2007. Compensation expense of $0.5 million was recorded based on the intrinsic value of the warrants on the grant date. In addition, Commonwealth received 250,000 shares of the Company’s common stock upon signing of the Advisory Agreement on June 7, 2002. Expense of $0.1 million was recorded based on the stock price on that date.

Interest expense increased for the first nine months of 2002 by 230% to $7.0 million, compared with $2.1 million in the first nine months of 2001. This was primarily due to the amortization of the deferred financing costs and the accretion of the discount on the bridge notes (see Note B), offset by lower levels of debt during 2002 due primarily to the March 2002 restructuring with Bank of America (see Note C).

Miscellaneous income increased to $23.1 million for the first nine months of 2002 from a net expense of $0.2 million for the first nine months of 2001. This increase relates primarily to the debt restructuring, including agreements reached with Bank of America, Relational Funding Corporation and its assignees, and certain other vendors and creditors. In addition, the Company terminated the Retirement Benefit Restoration Plan and other postretirement benefits. See Note C for additional description on the agreements and related gain. The increase also relates to the gain on the sale of an equity investment in a third party company that had been written down due to impaired value in 2000. In addition, the Company recognized a gain on the extinguishment of the outstanding indebtedness owed by the Company to Bank of America and the redemption of the 1 million shares of Preferred Stock held by Bank of America (see Note C). The Company also recognized a previously deferred gain on the sale of Array assets of $1.3 million (see Note E).

The net income increased for the first nine months of 2002 to $8.0 million, compared with a net loss of $6.9 million for the same period in 2001. This increase was primarily attributable to lower selling, general and administrative expenses and the gain on debt restructuring, offset by the reduction in sales and related gross profit.

Liquidity and Capital Resources:

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

	September 30, 2002		December 31, 2001
			(restated)
	(In Thousands)
Cash and cash equivalents	$	2,810	$	1,239
Current maturities of debt		732		2,596
Working capital		9,642		2,450

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

As of September 30, 2002, the Company’s cash and cash equivalents were higher than December 31, 2001 by $1.6 million and working capital improved by $7.2 million due primarily to the private placement financing (see Note B).

Inventories decreased by $5.3 million compared with December 31, 2001. Of the decrease, $2.1 million relates to a promissory note that was canceled by a supplier upon Comdial returning the original inventory purchased from the supplier. Upon return of the inventory, Comdial entered into a purchase commitment with the supplier to repurchase the inventory by January 2007, with a minimum monthly purchase amount of $25,000. In addition, as the Company completely transitioned to outsourcing its manufacturing operation, the overall inventory levels were reduced as Comdial no longer requires raw materials and components for production purposes.

During the third quarter of 2002, the Company experienced difficulties in fulfilling certain product orders as a result of the production transition from Virginia to the outsourcing partners plus a backlog that has been built up with one of the United States outsourcing partners. The

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problem is currently being addressed and is expected to be resolved during the fourth quarter. However, there is a risk that production issues could continue through the first quarter of 2003.

OTHER FINANCIAL INFORMATION

During the three and nine months ended September 30, 2002 and 2001, primarily all of Comdial’s sales, net income, and identifiable net assets were attributable to the telecommunications industry.

In March 2000, the Company entered into a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”), which agreement was subsequently assigned by Lucent to Avaya Inc. (“Avaya”). In June 2002, the Company settled its past reported dispute with Avaya whereby Comdial retains all the rights and licenses afforded under the existing patent license agreement. Beyond resolving its past obligations, an extension to the agreement was secured under Avaya’s patents owned and controlled at any time through the extension period. An adjustment to the royalty rate was made in consideration of the additional rights granted by Avaya. 

RECENT PRONOUNCEMENTS

During the first quarter of 2002, the Company adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). The Company realized an increase in pre-tax income of $0.4 and $1.2 million during the three and nine months ended September 30, 2002, respectively, due to the cessation of amortization on the goodwill. See Note M.

During the first quarter of 2002, the Company adopted Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets “(SFAS No. 144”). The adoption of SFAS No. 144 had no impact on the Company’s operations.

During the second quarter of 2002, the Company early adopted Financial Accounting Standards Board Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). SFAS No. 145 requires any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board Statement No. 30, Reporting the Results of Operations, for classification as an extraordinary item to be reclassified. Accordingly, the extraordinary gain of $11.9 million that was reported during the first quarter of 2002 has been reclassified and is included in miscellaneous income in the accompanying financial statements.

NASDAQ DELISTING

The Company’s common stock was delisted from the Nasdaq SmallCap Market on August 7, 2002.The Company had received a letter from Nasdaq on August 6, 2002 that explained Nasdaq’s decision. The letter stated that the decision to delist the Company’s stock was made principally due to the Company’s failure to obtain either shareholder approval prior to closing of the Bridge Financing transaction or permission from Nasdaq to proceed with the transaction in the absence of such approval. The Bridge Financing transaction resulted in the issuance of promissory notes to ComVest and Mr. Branica that are convertible into common stock substantially in excess of the threshold ownership levels permitted without shareholder approval under the applicable NASDAQ rules. The Company is attempting to have its common stock quoted on the NASD’s OTC-BB. NASDAQ determined that the Company was not eligible for immediate listing on the OTC-BB because part of the delisting order related to public interest concerns. Accordingly, the Company’s stock currently trades on the “pink-sheets.”The application to be quoted on the OTC-BB must be filed by one or more broker-dealers and the Company must meet certain requirements, including that its filings under the Exchange Act must be current. Certain broker-dealers have applied with the NASD to have the Company’s common stock quoted on NASD’s OTC-BB; however, to date, the Company has not been granted the right to be quoted on the OTC-BB. There can be no assurance that the Company’s stock will be quoted on the NASD’s OTC-BB in the future, in which case the Company’s stock will continue to trade through the pink-sheets.

OUTSOURCING RISKS

During 2002, Comdial outsourced all of its manufacturing requirements. Outsourced manufacturing is carried out in three principal locations: Asia, Mexico and the United States. Outsourcing carries certain risks which include, but may not be limited to: the financial solvency, labor concerns and general business condition of Comdial’s outsourcing contractors, political, legal and economic conditions, language and cultural barriers transportation problems, including, but not limited to, labor unrest, acts of terrorism affecting shippers, trade barriers, currency fluctuations and changes in regulatory requirements related to foreign locations, risks of fire, flood or acts of God affecting manufacturing facilities and Comdial’s ability to meet its financial obligations to our outsourcing contractors. As an example of the foregoing, the Company was adversely affected by the recently concluded port strike that resulted in the temporary closure of certain ports on the West Coast of the United States. In addition, Comdial’s outsourcing contractors acquire component parts from various suppliers. Similar risks are involved in such procurement efforts. Due to the

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Company’s dependency on outsourced manufacturing and the inherent difficulty in replacing outsourced manufacturing capacity in an efficient or expeditious manner, the occurrence of any condition preventing or hindering the manufacture or delivery of manufactured goods by any one or more of its outsourcing contractors could have a material adverse effect on Comdial’s business and financial results.

During the third quarter of 2002, the Company experienced difficulties in fulfilling certain product orders as a result of the production transition from Virginia to the outsourcing partners plus a backlog that has been built up with one of the United States outsourcing partners. The problem is currently being addressed and is expected to be resolved during the fourth quarter. However, there is a risk that production issues could continue through the first quarter of 2003.

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

Some of the statements included in or incorporated by reference into Comdial Corporation’s Securities and Exchange Commission filings, press releases and shareholder communications and other information provided periodically in writing or orally by its officers or agents, including this Form 10-Q, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including, but not limited to, Comdial Corporation’s ability to obtain continued funding for its business, its ability to prevent continued losses and to generate sufficient operating revenue to meet its obligations to vendors, suppliers, other creditors and its employees, the illiquidity of its stock as a result of its delisting on the Nasdaq SmallCap Market, its ability to maintain compliance with the material terms and covenants of its working capital facility and its note with Bank of America, N.A., the risks associated with the outsourcing of its manufacturing requirements, including, without limitation, international risk factors and its ability to meet its payment obligations to such manufacturers, risks associated with unfavorable customer acceptance and response to its products, risks associated with potential claims against the Company that its products infringe on the intellectual property rights of any other party, unfavorable outcomes of pending litigation and the various other factors set forth from time to time in Comdial’s filings with the SEC, including but not limited to Comdial’s most recent Form 10-K. Comdial Corporation undertakes no obligation to publicly update or revise the forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Comdial believes that it does not have any material exposure to market risk associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments.

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d–14(c)) as of a date within 90 days of the filing date of this quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

Changes in internal controls

There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.

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PART II - OTHER INFORMATION

ITEM 1.    Legal Proceedings

See Note K of the Condensed Consolidated Financial Statements contained in Part I, Item 1 above.

ITEM 2.    Changes in Securities

On August 26, 2002, at the Company’s special meeting of shareholders, the Company received shareholder approval to amend and restate the Company’s Certificate of Incorporation to increase the authorized number of shares of capital stock from 32,000,000 to 152,000,000 shares, consisting of 150,000,000 shares of common stock and 2,000,000 shares of preferred stock. On September 27, 2002 but effective November 7, 2002, the Board and the holders of a majority of the outstanding shares of common stock approved an increase in the Company’s authorized shares of common stock to 500,000,000 in order to reserve a sufficient number of shares to provide for conversion of the Placement Notes and the Winfield Note, assuming a minimum conversion price of $.05.

On August 15, September 9, September 25, and September 26, 2002, the Company closed on additional sales of $475,000, $475,000, $25,000, and $25,000, respectively, to complete the Bridge Note financings, which commenced on June 21, 2002. These financings, together with the previously disclosed bridge financings of $3,000,000, which closed on June 21 and July 12, 2002, brought the total bridge financings to $4,000,000. On or prior to September 27, 2002, each of the holders of the Bridge Notes exercised their right to convert 13.33% of the principal amount of the Bridge Notes into shares of common stock at a conversion price of $0.01 per share. The Company issued an aggregate of 53,320,000 shares pursuant to such conversions.

On September 27, 2002 and October 29, 2002, the Company consummated a closing of approximately $12.5 million and $775,000, respectively, under the private placement. This includes the conversion of the remaining Bridge Notes of approximately $3.5 million. The Private Placement consisted of 7% subordinated secured convertible promissory notes (the “Placement Notes”) and warrants to purchase an aggregate of approximately 62.7 million shares of the Company’s common stock at an exercise price of $0.01 per share (the “Placement Warrants”). An aggregate of 12.5 million of the Placement Warrants are subject to forfeiture, on a pro rata basis, if the Placement Notes are repaid during the first eighteen months following their issuance. The Placement Notes may in the future be convertible under certain circumstances at the option of the Company if the common stock of the Company trades at or above $1.00 for 20 consecutive trading days. The initial convertible price of the Placement Notes is $0.33 per share. The conversion price of the Placement Notes is subject to downward adjustment in the event of certain defaults.

Also on September 27, 2002, the Company consummated a private placement with Winfield Capital Corp. of $2.0 million (the “Winfield Transaction”). The Winfield Transaction consisted of 12% subordinated secured convertible promissory notes (the “Winfield Notes”) and warrants to purchase 5.5 million shares of common stock at an exercise price of $0.01 per share (the “Winfield Warrants”). The Winfield Notes are convertible on the same terms and subject to the same conditions as the Placement Notes.

Pursuant to the terms of the previously disclosed advisory agreement between the Company and Commonwealth Associates, LP (“Commonwealth”), and as a result of the closings of the Bridge Notes and the Private Placement, the Company issued warrants to Commonwealth to acquire 3,404,202 shares of common stock at an exercise price of $0.01 per shares. Pursuant to the terms of a placement agency agreement and as a result of the Private Placement and the Winfield Transaction the Company issued warrants to Commonwealth to acquire 6,270,900 and 550,000 shares, respectively, of common stock at an exercise price of $0.01 per share.

As previously reported, ComVest Venture Partners, L.P. (“ComVest”), an affiliate of Commonwealth, entered into an agreement with Bank of America, N.A., (“BofA”), the Company’s senior lender, to purchase the senior secured debt position held by Bank of America in the Company and 1 million shares of the Company’s Series B Alternate Rate Preferred Stock (having a liquidation value of $10 million). Pursuant to such agreement, ComVest had the right to purchase for an aggregate of $6.5 million, the approximate $12.7 million in outstanding indebtedness owed by the Company to BofA and the 1 million shares of Preferred Stock. Contemporaneously with the closing of the Private Placement and the Winfield Transaction, ComVest assigned its right to purchase the debt and the Preferred Stock to the Company, and the Company used $6.5 million of the proceeds of the Private Placement and the Winfield Transaction to effectuate the repurchase and to repay BofA in full.

The issuances described above were intended to be exempt from the registration requirements of the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated thereunder.

ITEM 4.    Submission Matters to a Vote of Security Holders

On August 26, 2002, at the Company’s special meeting of shareholders held at its corporate headquarters in Sarasota, Florida, the Company received shareholder approval for all of the proposals presented. Of a total of 27,041,434 outstanding shares of common stock of the Company as of the record date of July 19, 2002, 25,351,813 shares (93.7% of the number outstanding) were represented at the meeting by proxy, including 281,271 shares that were voted by proxies submitted by shareholders at the meeting. 1,689,621 shares were not represented at the meeting.

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The shares voted regarding Proposal No. 1, to approve an amendment to the Company’s Restated Certificate of Incorporation authorizing the issuance of up to 150 million shares of common stock (from 30 million under the prior authorization) were as follows:

For	23,945,995
Against	1,381,762
Abstain	24,056

Proposal No. 2, to approve an amendment to the Company’s Restated Certificate of Incorporation authorizing the Board of Directors of the Company at its discretion to effect a reverse stock split in the ratio of one-for-five (1:5), one-for-seven (1:7), one-for-ten (1:10) or one-for-fifteen (1:15), was also passed. Each of the foregoing ratios was presented as a separate proposal and voted on separately as items 2a, 2b, 2c and 2d, respectively. In addition, item 2e proposed authorization for the Board to abandon any reverse stock split if warranted in the Board’s discretion. The shares voted regarding Proposal No. 2 were as follows:

	2a		2b		2c		2d		2e
For		24,522,525		24,446,317		24,560,006		24,460,987		24,732,266
Against		603,184		667,393		615,900		436,726		446,494
Abstain		160,425		174,424		172,907		172,829		107,434

The shares voted regarding Proposal No. 3, to approve an amendment to the Company’s Restated Certificate of Incorporation permitting shareholder action to be taken by written consent without a meeting were as follows:

For	19,907,524
Against	455,941
Abstain	254,350
Broker non-votes	4,733,998

The shares voted regarding Proposal No. 4, to approve an amendment to the Company’s Restated Certificate of Incorporation providing for approval by majority vote of all actions submitted to shareholders other than the election of directors, which requires a plurality under Delaware law were as follows:

For	20,030,824
Against	558,048
Abstain	28,493
Broker non-votes	4,733,998

The shares voted regarding Proposal No. 5, to approve the adoption of the Company’s proposed 2002 Employee and Non-Employee Director Stock Incentive Plan were as follows:

For	18,937,607
Against	1,644,301
Abstain	35,907
Broker non-votes	4,733,998

The shares voted regarding Proposal No. 6, to ratify the Company’s bridge financing private placement that was initially closed on June 21, 2002 were as follows:

For	19,464,634
Against	1,093,565
Abstain	59,616
Broker non-votes	4,733,998

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ITEM 6.    Exhibits and Reports on Form 8-K.

(a) Exhibits included herein:

(3)	Articles of incorporation and bylaws:
3.1	Form of Amended and Restated Certificate of Incorporation filed on August 27, 2002
3.2	Form of Amended and Restated Certificate of Incorporation filed on November 7, 2002
(4)	Instruments defining the rights of security holders:
4.1	Form of Subscription Agreement (Exhibit 4.1 to Registrant’s Form 8-K filed On October 1, 2002)*
4.2	Form of 7% Senior Subordinated Secured Convertible Note (Exhibit 4.2 to Registrant’s Form 8-K filed on October 1, 2002)*
4.3	Form of Warrant (Exhibit 4.3 to Registrant’s Form 8-K filed on October 1, 2002)*
4.4	Form of Warrant, with forfeiture provision (Exhibit 4.4 to Registrant’s Form 8-K filed on October 1, 2002)*
4.5	General Security Agreement (Exhibit 4.5 to Registrant’s Form 8-K filed on October 1, 2002)*
4.6	Form of Winfield Subscription Agreement (Exhibit 4.6 to Registrant’s Form 8-K filed on October 1, 2002)*
4.7	Form of Winfield 12% Senior Subordinated Secured Convertible Note (Exhibit 4.7 to Registrant’s Form 8-K filed on October 1, 2002)*
4.8	Form of Winfield Warrant (Exhibit 4.8 to Registrant’s Form 8-K filed on October 1, 2002)*
4.9	Winfield General Security Agreement (Exhibit 4.9 to Registrant’s Form 8-K filed on October 1, 2002)*
4.10	Form of Advisory Warrant (Exhibit 4.10 to Registrant’s Form 8-K filed on October 1, 2002)*

*    incorporated by reference herein.

(99)	Additional Exhibits:
99.1	Certification of Nickolas A. Branica, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2	Certification of Paul K. Suijk, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2	Certification of Nickolas A. Branica, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.3	Certification of Paul K. Suijk, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

On July 5, 2002, the Company filed a report on Form 8-K disclosing the terms of the bridge financing, with the initial closing held on June 21, 2002.

On July 24, 2002, the Company filed a report on Form 8-K disclosing an additional sale of Bridge Notes in connection with the bridge financing.

On August 1, 2002, the Company filed a report on Form 8-K disclosing its receipt of and response to a Staff Determination Letter regarding its listing on the SmallCap Market, as a result of the Company’s non-compliance with Nasdaq Marketplace Rules, requiring shareholder approval prior to commencement of the private placement.

On August 7, 2002, the Company filed a report on Form 8-K disclosing that it was advised that the Listing Qualifications Panel rendered its decision to delist the Company’s securities from the Nasdaq Stock Market, effective August 7, 2002.

On August 27, 2002, the Company filed a report on Form 8-K disclosing an additional sale of Bridge Notes in connection with the bridge financing, the settlement of a patent infringement claim, and the results of the shareholder meeting held on August 26, 2002.

On September 5, 2002, the Company filed a report on Form 8-K, disclosing the decision by the American Arbitration Association in the arbitration between the Company and ePHONE Telecom, Inc. (“ePHONE”), whereby ePHONE was ordered to pay the Company $1,730,903 on the Company’s counterclaim.

On September 19, 2002, the Company filed a report on Form 8-K disclosing an additional sale of Bridge Notes in connection with the bridge financing.

Items not listed if not applicable.

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SIGNATURES

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

	Comdial Corporation (Registrant)
By:	/s/ NICKOLAS A. BRANICA
	Nickolas A. Branica                 President and         Chief Executive Officer

By:	/s/ PAUL K. SUIJK
	Paul K. Suijk   Senior Vice President and Chief Financial Officer Date: November 14, 2002

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EX-3.1

Exhibit 3.1

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COMDIAL CORPORATION
Pursuant to, and in accordance with, Sections 242 and 245
of the General Corporation Law of the State of Delaware

(Originally incorporated under the same name, and the original Certificate of
Incorporation was filed with the Secretary of the State of Delaware on April 6, 1982.)

Article 1 – Name

         The name of the Corporation is:

COMDIAL CORPORATION

Article - Purpose

         The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

Article 3 – Capital Stock

         The aggregate number of shares of capital stock which the corporation has the authority to issue is One Hundred Fifty Two Million (152,000,000), which is divided into two classes as follows:

         Two Million (2,000,000) shares of Preferred Stock (Preferred Stock) with a par value of $10.00 per share, One Million (1,000,000) of which shall be a series designated as Series B Alternate Rate Cumulative Convertible Redeemable Preferred Stock, and

         One Hundred Fifty Million (150,000,000) share of Common Stock (Common Stock) with a par value of $0.01 per share.

         The designations, voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the above classes of stock are as follows:

I. Preferred Stock

         (1)      Issuance in Series.

         Shares of Preferred Stock may be issued in one or more series at such time or times, and for such consideration or considerations as the board of directors may determine. All shares of any one series of Preferred Stock will be identical with each other in all respects, except that shares of one series issued at different times may differ as to dates for which dividends thereon may be cumulative. All series will rank equally and be identical in all respects except as permitted by the following provisions of paragraph 2 of this Division I.

         (2)      Authority of the Board with Respect to Series.

         The board of directors is authorized, at any time and from time to time, to provide for the issuance of the shares of Preferred Stock in one or more series with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as are stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the board of directors, and as are not stated and expressed in this Certificate of Incorporation or any amendment hereto including, but not limited to, determination of any of the following:

         (i)        The number of shares constituting that series and the distinctive designation of that series;

         (ii)      The dividend rate or rates on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, the payment date or dates for dividends and the relative rights of priority, if any, of payment of dividends on shares of that series;

         (iii)     Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights;

         (iv)      Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the board of directors shall determine;

         (v)        Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including that date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

         (vi)      Whether that series shall have a sinking or retirement fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking or retirement fund;

         (vii)     The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series;

         (viii)    Any other preferences, privileges and powers, and relative participating, optional or other special rights, and qualifications, limitations or restrictions of a series, as the board of directors may deem advisable and are not inconsistent with the provisions of this Certificate of Incorporation.

         (3)      Dividends.

         Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment in accordance with their respective preferential and relative rights before any dividends shall be paid or declared and set apart for payment on the outstanding shares of Common Stock with respect to the same dividend period.

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          (4)    Liquidation.

         If upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential and relative amounts (including unpaid cumulative dividends, if any) payable with respect thereto.

         (5)      Reacquired Shares.

         Shares of Preferred Stock which have been issued and reacquired in any manner by the corporation (excluding, until the corporation elects to retire them, shares which are held as treasury shares but including shares redeemed, shares purchased and retired, and shares which have been converted into shares of Common Stock) will have the status of authorized and unissued shares of Preferred Stock and may be reissued.

         (6)      Voting Rights.

         Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the board of directors creating any series of Preferred Stock pursuant to this Division I, the holders of the Preferred Stock shall have no voting power with respect to any matter whatsoever. In no event shall the Preferred Stock be entitled to more than one vote in respect of each share of stock except as may be required by law or by this Certificate of Incorporation.

II. Series B Alternate Rate Cumulative Convertible Redeemable Preferred Stock

         (1)      Designation and Amount.

         The shares of such series shall be designated as the “Series B Alternate Rate Cumulative Convertible Redeemable Preferred Stock” (hereinafter “Series B Preferred Stock”) and the number of shares constituting such series shall be 1,000,000 and no more.

         (2)      Dividends and Distributions.

         (a)       Subject to paragraph (b) of this Section 2, the holders of shares of Series B Preferred Stock, in preference to the holders of shares of the Company’s Common Stock, par value $0.01 per share (“Common Stock”), shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds of the Company legally available for the payment of dividends, quarterly dividends per share payable in cash in the following amounts: $0.125 on the last day of March, $0.125 on the last day of June, $0.125 on the last day of September, and $0.125 on the last day of December in each year (each such date being referred to as a “Quarterly Dividend Payment Date”) commencing on the first Quarterly Dividend Payment Date which is after the date of issue of such shares of Series B Preferred Stock; provided, however, that with respect to such first Quarterly Dividend Payment Date, the holders of shares of Series B Preferred Stock shall be entitled pursuant to this paragraph (a) to receive the pro rata portion of such quarterly dividend on the basis of the number of days elapsed between the date of issue and the first Quarterly Dividend Payment Date. Such dividends shall be cumulative and shall accrue from the date of issue until paid in cash.

         (b)       Alternatively, in lieu of paying a dividend on the Series B Preferred Stock in cash, the Company shall have the option of paying any such dividend, when paid, in shares of the Company’s Common Stock at a rate equal to two times the cash dividend rate provided in Section 2(a) above, and in any such case the value of shares of Common Stock paid as a dividend on the Series B Preferred Stock shall be determined as provided for in the following paragraphs:

         If the Company elects to issue the dividend in shares of Common Stock rather than cash, the Company shall issue the holder the number of shares of Common Stock having an aggregate Current Market Value equal to two times the amount of the dividend payable to the holder had the Company elected that the dividend be paid in cash, provided, however, the Company may not elect to issue dividends in shares of Common Stock if such issuance would result in the holders of Series B Preferred Stock owning an amount of the outstanding common stock of the Company on an as-converted basis that would require the Company to obtain stockholder approval under NASDAQ Rule 4350(i). The “Current Market Value” for a share of the Common Stock shall be determined as follows:

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           (i)     if the Common Stock shall be listed (or admitted to unlisted trading privileges) on any single national securities exchange, then the Current Market Value shall be computed on the basis of the last reported sale price of the Common Stock on such exchange on the third Business Day prior to the Quarterly Dividend Payment Date, or if no such sale shall have occurred on such day, then on the next Business Day prior thereto on which day a sale occurred; or

          (ii)      if the Common Stock shall not be so listed (or admitted to unlisted trading privileges) and bid and asked prices therefor in the over-the-counter market shall be reported by NASDAQ, including the Nasdaq National Market and the Nasdaq SmallCap Market, then the Current Market Value shall be the average of the closing bid and asked prices for the five trading days ending on the third Business Day prior to the Quarterly Dividend Payment Date; or

          (iii)     if the Common Stock shall be listed (or admitted to unlisted trading privileges) on more than one national securities exchange or one or more national securities exchanges and in the over-the-counter market, then the Current Market Value shall, if different as a result of calculation under the applicable method(s) described above in (i) and (ii) above, be deemed to be the higher number calculated in connection therewith; or

          (iv)     if the shares of Common Stock are traded over the counter, but not on any national securities exchange and not in the NASDAQ National Market System or the Nasdaq SmallCap Market System, then the Current Market Value shall be the average of the mean bid and asked prices per share for the five trading days ending on the third Business Day prior to the Quarterly Dividend Payment Date, as reported by Pink Sheets LLC, or an equivalent generally accepted reporting service; or

          (v)     if the Common Stock shall not be so listed, admitted to unlisted trading privileges, or traded over the counter, and such bid and asked prices shall not be so reported, then the Current Market Value shall be the average of the mean bid and asked prices per share for the last ten trading days on which bid and asked prices were reported prior to the third Business Day prior to the Quarterly Dividend Payment Date.

         The Company shall not be required to issue fractional shares of Common Stock in connection with its election to pay the dividend in shares of Common Stock. If any fraction of a share of Common Stock would be issuable upon the payment of the dividend (or any specified portion thereof), the Company shall pay an amount in cash equal to the product of (a) such fraction and (b) the Current Market Value of a share of the Common Stock, determined as set forth above.

         (c)       Dividends paid on shares of Series B Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis to all such shares of Series B Preferred Stock at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series B Preferred Stock entitled to receive payments of a dividend declared thereon, which record date shall be no more than 60 days nor less than ten days prior to the date fixed for the payment thereof.

         (d)       The holders of shares of Series B Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided in this Certificate of Designation of Series B Alternate Rate Cumulative Convertible Redeemable Preferred Stock.

         (3)      Required Approval.

         The shares of Series B Preferred Stock shall not have any voting powers, either general or special, except as required by applicable law and shall have approval rights as follows:

         (a)       Without the approval of the holders of at least 67% of the shares of Series B Preferred Stock at the time outstanding, the Company shall not amend its Certificate of Incorporation to, adopt a certificate of designation to, or otherwise (i) create any class of stock or issue any series of Preferred Stock or any other equity security ranking prior to or in parity with the Series B Preferred Stock as to dividends or upon liquidation; provided, however, that such approval shall not be required if the creation or issuance of the class or series of equity securities ranking prior to or in parity with the Series B Preferred Stock as to dividends or upon liquidation is created or issued in an Approved Transaction, as defined in Section 8 herein;or (ii) alter or change any of the preferences, privileges, rights or powers of the holders of the Series

4

         B Preferred Stock so as to affect adversely such preferences, privileges, rights or powers.

         (b)       In the event that any four consecutive quarterly dividends upon the Series B Preferred Stock which the holders of the Series B Preferred Stock are entitled to receive hereunder shall be in arrears and unpaid either in cash or in-kind, the holders of Series B Preferred Stock shall have the exclusive and special right, voting separately as a class, to elect two (2) members of the Board of Directors or such greater number of members as is necessary to equal at least 20% of the total number of members of the Board of Directors at all times thereafter.

         (4)      Certain Restrictions.

         Whenever quarterly dividends payable on shares of Series B Preferred Stock pursuant to the terms of Section 2 are in arrears, then thereafter and until all accrued and unpaid dividends on shares of Series B Preferred Stock outstanding shall have been paid in full or declared and set apart for payment, the Company shall not declare or pay dividends on, or make any other distributions on any shares of any series or class other than Series B Preferred Stock or purchase, redeem or otherwise acquire any shares of any series or class other than Series B Preferred Stock; provided, however, that such restrictions shall be deemed to be waived by the holders of the outstanding shares of the Series B Preferred Stock if the declaration or payment of dividends or distributions, or the repurchase, redemption or other acquisition, is with regard to a series or class of capital stock issued in an Approved Transaction.

         (5)      Redemption.

         (a)       The outstanding shares of Series B Preferred Stock may be redeemed at the option of the Company, in whole or in part, at any time upon not less than 30 days nor more than 90 days prior written notice to all holders of record of shares of Series B Preferred Stock to be so redeemed, at a redemption price equal to all accumulated but unpaid dividends to and including the date fixed for redemption of such shares (the “Redemption Date”) plus an amount (the “Applicable Amount”) equal to (i) during the four calendar years after the year of issuance of the Series B Preferred Stock, $10.00 per share or (ii) during each calendar year after the fourth year, an amount equal to the Applicable Amount in the preceding year plus $0.50 per share; provided that the redemption price per share for any transaction which results in the total number of shares of Series B Preferred Stock that have been redeemed (including the shares redeemed in such transaction) equaling at least ten percent (10%) of the total number of shares of Series B Preferred Stock which were originally issued, and for all subsequent transactions, shall be the same price as was in effect during the year preceding the transaction which results in the redemption of at least ten percent (10%) of the originally issued Series B Preferred Stock. Subject to delivery of certificates for the shares to be redeemed, the Company shall pay the Applicable Amount plus all accumulated but unpaid dividends on the Redemption Date.

         (b)       Unless default shall be made in the payment in full of the redemption price and any accumulated and unpaid dividends, dividends on the shares of Series B Preferred Stock called for redemption shall cease to accumulate on the Redemption Date, and al1 rights of the holders of such shares as stockholders of the Company by reason of the ownership of such shares shall cease on the Redemption Date, except the right to receive the amount payable upon redemption of such shares on presentation and surrender of the respective certificates representing such shares. After the Redemption Date, such shares shall not be deemed to be outstanding and shall not be transferable on the books of the Company except to the Company.

         (c)       At any time on or after the Redemption Date, the respective holders of record of shares of Series B Preferred Stock to be redeemed shall be entitled to receive the redemption price upon actual delivery to the Company of certificates for the shares to be redeemed, such certificates, if required by the Company, to be properly stamped for transfer and duly endorsed in blank or accompanied by proper instruments of transfer thereof duly executed in blank.

5

          (6)    Liquidation, Dissolution or Winding - Up.

         In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of the Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall be made to the holders of any other class or series of capital stock of the Company, an amount equal to $10.00 per share plus an amount equal to all dividends accrued thereon to and including the date of payment; provided, however, the holders of the Series B Preferred Stock shall be deemed to have waived such priority of payment with regard to another class or series of capital stock issued in an Approved Transaction.

         (7)      Conversion.

         (a)       Conversion Ratio. Each share of Series B Preferred Stock shall be convertible at any time at the option of the holder thereof, into shares of Common Stock. Subject to the other terms of this Section 7, the number of shares of Common Stock deliverable upon conversion of one share of Series B Preferred Stock shall be one and one-half (1.5) shares of Common Stock, provided, however, in the event that while shares of Series B Preferred Stock are held by Bank of America, N.A. or a nominee thereof the Company issues new shares of equity securities to investors for new funding and a portion of the proceeds is used to make a reduction in the outstanding principal amount of the Company’s Term Loan, the conversion ratio shall be adjusted as follows:

Term LoanPaydown	Conversion Ratio		Pre Conversion Equity			No. Shares of Common
$0		1.5:1		16.30	%		1,500,000
$1.0 million		1.4:1		15.22	%		1,400,000
$1.5 million		1.3:1		14.13	%		1,300,000
$2.0 million		1.2:1		13.04	%		1,200,000
$2.5 million		1.0:1		10.87	%		1,000,000
$3.0 million		0.5:1		5.43	%		500,000

For the purposes of this Section 7(a), the “Term Loan” shall mean the term loan payable to Bank of America, N.A. in the original principal amount of $4,903,874.69, due March 31, 2003, evidenced by a Term Loan Note dated March 6, 2002, as such term loan note may be amended, modified, renewed or replaced.

         (b)       Exercise of Conversion Privilege. Each holder of outstanding shares of Series B Preferred Stock may exercise the conversion right provided in paragraph (a) above as to all or any portion of the shares he holds by delivering to the Company during regular business hours, at the principal office of the Company or at such other place as may be designated in writing by the Company, the certificate or certificates for the shares to be converted, duly endorsed or assigned in blank or endorsed or assigned to the Company (if required by it), accompanied by written notice stating that the holder elects to convert such shares and stating the name or names (with address and applicable social security or other tax identification number) in which the certificate or certificates for shares of Common Stock are to be issued. Conversion shall be deemed to have been effected on the date (the “Conversion Date”) when such delivery is made. As promptly as practicable thereafter the Company shall issue and deliver to or upon the written order of such holder, at such office or other place designated by the Company, a certificate or certificates for the number of shares of Common Stock to which he is entitled and a check or other order for the payment of cash due with respect to any fraction of a share, as provided in paragraph (c) below. The person in whose name the certificate or certificates for shares of Common Stock are to be issued shall be deemed to have become a shareholder of record on the Conversion Date, unless the transfer books of the Company are closed on that date, in which event he shall be deemed to have become a shareholder of record on the next succeeding date on which the transfer books are open; but the Conversion Price shall be that in effect on the Conversion Date.

6

          (c)       No Fractional Shares. The Company shall not be required to issue fractional shares of Common Stock upon conversion of shares of Series B Preferred Stock. If more than one share of Series B Preferred Stock shall be surrendered for conversion at any time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the total number of shares of Series B Preferred Stock so surrendered. If any fractional interest in a share of Common Stock would be deliverable upon conversion, the Company shall make an adjustment therefor in cash based on the Current Market Value of one share of Common Stock on the Conversion Date. The “Current Market Value” for purposes of this paragraph shall be determined as set forth in Section 2(b), except that each reference to “Quarterly Dividend Payment Date” in Section 2(b) shall mean “Conversion Date” for purposes of this paragraph.

         (d)       Taxes Payable on Conversion. The issuance of shares of Common Stock on conversion of outstanding shares of Series B Preferred Stock shall be made by the Company without charge for expenses or for any tax in respect of the issuance of such shares of Common Stock, but the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in any name other than that of the holder of record on the books of the Company of the outstanding shares of Series B Preferred Stock converted, and the Company shall not be required to issue or deliver any certificate for shares of Common Stock unless and until the person requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

         (e)       Conversion Price Adjustments. The Conversion Price of the Series B Preferred Stock shall be subject to adjustment from time to time as follows:

                  (i)         (A)     If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share that is less than the Market Price in effect immediately prior to the issuance of such Additional Stock, the Conversion Price shall forthwith (except as otherwise provided in this clause (i)) be adjusted as to equal the price determined by the following formula:

NP =	OP         x         (P x N) + C
	(P x (N + n))

where

NP =	new Conversion Price,
OP =	old Conversion Price,
P   =	Market Price in effect immediately prior to the issuance of Additional Stock,
N   =	the number of shares of Common Stock outstanding immediately prior to the issuance of Additional Stock (including for this purpose the number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock at the Conversion Price in effect immediately prior to such issuance),
C   =	the aggregate consideration to be received by the Company for the Additional Stock, and
n   =	the number of shares of Additional Stock to be issued.

The “Market Price” shall mean the Current Market Value as defined in Section 2(b) hereof, with the date of measurement under sub-clauses (i) to and including (v) of Section 2(b) being, for the purposes of this Section 7(e), the third Business Day prior to the Issuance Date of such Additional Stock rather than the third Business Day prior to the Quarterly Dividend Payment Date.

                              (B)         No adjustment of the Conversion Price for the Series B Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments that are thereby not required to be made shall be carried forward and shall be taken into account in any subsequent adjustment. Except to the limited extent provided for in Subsection 7(e)(i)(E)(3), no adjustment of the Conversion Price pursuant to this Subsection 7(e)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment.

                              (C)         In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before

7

deducting any reasonable discounts , commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof.

                              (D)         In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment.

                              (E)         In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (which are not excluded from the definition of Additional Stock), the following provisions shall apply:

                                              (1)         subject to subparagraph (4) below, the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Subsections 7(e)(i)(C) and 7(e)(i)(D)), if any, received by the Company upon the issuance of such options or rights plus the additional consideration, if any, to be received by the Company upon the exercise of such options or rights for the Common Stock covered thereby;

                                              (2)         subject to subparagraph (4) below, the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and the subsequent conversion or exchange thereof shall be deemed to have been issued at the time such convertible or exchangeable securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such convertible or exchangeable securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Subsections 7(e)(i)(C) and 7(e)(i)(D));

                                              (3)         in the event of any increase in the number shares of Common Stock deliverable upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Conversion Price then in effect shall forthwith be readjusted to such Conversion Price as would have been obtained had the adjustment that was made upon the issuance of such options, rights or securities not converted prior to such change or the options or rights related to such securities not converted prior to such change been made upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise of any such options or rights or the conversion or exchange of such securities; and

                                              (4)         upon the expiration of any such options or rights, the termination of any such right s to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have been obtained had the adjustment that was made upon the issuance of such options, rights or securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities.

                  (ii)       “Additional Stock” shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Subsection 7(e)(i)(E)) on any date (“Issuance Date”), other than:

                              (A)         Common Stock issued pursuant to a transaction described in Subsection 7(e)(iii) hereof,

                              (B)         Common Stock issuable or issued to directors, employees or consultants of the Company directly or pursuant to a stock option or other plan,

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                              (C)         Common Stock issued or issuable upon conversion of any outstanding Series B Preferred Stock, and

                              (D)         Common Stock issued in an Approved Transaction.

                  (iii)      If the Company should at any time or from time to time after the Issuance Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), the applicable Conversion Price of the Series B Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series B Preferred Stock shall be increased in proportion to such increase of outstanding shares.

                  (iv)       If the number of shares of Common Stock outstanding at any time after the Issuance Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, following the record date of such combination or reverse stock split, the applicable Conversion Price of the Series B Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series B Preferred Stock shall be decreased in proportion to such decrease in outstanding shares.

                  (v)         In case of any consolidation or merger of the Company with or into another corporation or the conveyance of all or substantially all of the assets of the Company to another corporation, adequate provision shall be made by the Company or by the successor or purchasing business entity so that each share of Series B Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock deliverable upon conversion of such Series B Preferred Stock immediately before the effectiveness of such consolidation, merger or conveyance, would have been entitled upon such consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to changes in and other adjustment of the Conversion Price of the Series B Preferred Stock) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series B Preferred Stock.

         (f)       Other Distributions. If the Company shall declare a distribution payable to holders of Common Stock in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights not referred to in Subsection 7(e) (iii), then, in each such case for the purpose of this Subsection 7(f), the holders of the Series B Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Company into which their shares of Series B Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution.

         (g)       Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination, merger, sale of assets or other transaction provided for elsewhere in this Section 7), provision shall be made so that the holders of the Series B Preferred Stock shall thereafter be entitled to receive upon conversion of the Series B Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion immediately before the effectiveness of such recapitalization would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 7 with respect to the rights of the holders of the Series B Preferred Stock after the recapitalization to the end that the provisions of this Section 7 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series B Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.

         (h)       No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of

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assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 7 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series B Preferred Stock against impairment.

         (i)       Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price of the Series B Preferred Stock pursuant to this Section 7, the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series B Preferred Stock, by first class mail, postage prepaid, a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement setting forth (A) the consideration received or to be received by the Company for any Additional Stock, (B) the Conversion Price then in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of the Series B Preferred Stock.

         (j)       Notices of Record Date. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each holder of Series B Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right.

         (k)       Notices. Any notice required by the provisions of this Section 7 to be given to the holder of shares of Series B Preferred Stock shall be deemed given when personally delivered to such holder or five business days after the same has been deposited in the United States mail, certified or registered mail, return receipt requested, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Company.

         (l)       Effect of Conversion After Certain Record Dates. If any shares of Series B Preferred Stock are converted into shares of Common Stock after the record date for the happening of any of the events described in subparagraphs (i), (ii) or (iii) of Section 7(e) but before the happening of such event the Company may defer, until the happening of such event, (i) issuing to the holder of shares of Series B Preferred Stock so converted the shares of Common Stock which he is entitled to receive because of the adjustments required pursuant to any such subparagraph and (ii) paying to such holder any cash in lieu of a fractional share pursuant to this Section 7.

         (m)       Reservation of Stock Issuable on Conversion. Shares of Common Stock issued on conversion of shares of Series B Preferred Stock shall be issued as fully paid shares and shall be nonassessable by the Company. The Company shall, at all times, reserve and keep available for the purpose of effecting the conversion of the outstanding shares of Series B Preferred Stock such number of its duly authorized shares of Common Stock as shall be sufficient to effect the conversion of all of the outstanding shares of Series B Preferred Stock.

         (8)      Approved Transactions.

         As used in Sections 3, 4, 6 and 7 of this Certificate, the term “Approved Transaction” shall mean any transaction entered into by the Company which results in the issuance of shares of the Company’s capital stock (or securities convertible into or exchangeable or exercisable for shares of capital stock) to a third party so long as such transaction shall have been approved or consented to, in either case in writing, by a majority of the holders of the outstanding shares of Series B Preferred Stock. The approval of or consent to such transaction shall be deemed to have been given by such holders of a majority of the Series B Preferred Stock if such holders shall have received a Third Party Opinion customary in form and substance that the transaction is fair to the Company from a financial point of view not less than five business days prior to the closing of such transaction. The term “Third Party Opinion” shall mean a fairness opinion addressed to the Company’s Board of Directors and the holders of a majority of the Series B Preferred Stock from a nationally recognized investment banking firm selected by the Company which selection shall be subject to the approval of the holders of a majority of the Series B Preferred Stock.

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          (9)    Transfer Restrictions.

         The holder of any shares of Series B Preferred Stock shall not transfer or purport to transfer any such shares unless he shall have given to the Company, through its Secretary, at least fifteen (15) business days’ written notice of the proposed transfer, the number of shares proposed to be transferred, the price at which the proposed transfer is to be made, and the name of the prospective transferee. During such fifteen (15) business days, the Company shall have the sole option to exercise its right of redemption consistent with the terms of Section 5 of this Certificate.

III. Common Stock

         (1)      Dividends.

         Subject to the preferential rights of the Preferred Stock, the holders of the Common Stock are entitled to receive, to the extent permitted by law, such dividends as may be declared from time to time by the board of directors.

         (2)      Liquidation.

         In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of Preferred Stock, holders of Common Stock shall be entitled to receive all of the remaining assets of the corporation of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. The board of directors may distribute in kind to the holders of Common Stock such remaining assets of the corporation or may sell, transfer or otherwise dispose of all or any part of such remaining assets to any other corporation, trust or other entity and receive payment therefor in cash, stock or obligations of such other corporations, trust or other entity, or combination thereof in kind to holders of Common Stock. The merger or consolidation of the corporation into or with any other corporation, or the merger of any other corporation into it, or any purchase or redemption of shares of stock of the corporation of any class, shall not be deemed to be a dissolution, liquidation or winding up of the corporation for the purposes of this paragraph.

         (3)      Voting Rights.

         Except as may be otherwise required by law or this Certificate of Incorporation, each holder of Common Stock has one vote in respect of each share of stock held by him of record on the books of the corporation on all matters voted upon by the stockholders.”

Article 4 – Existence

         The corporation is to have perpetual existence.

Article 5 – Amendment of Bylaws

         In furtherance and not in limitation of the powers conferred by statute, the board of directors is authorized to adopt, amend and repeal the Bylaws of this corporation.

Article 6 – Directors

         (a)       The number of directors of the corporation shall be fixed from time to time in the manner set for the in the Bylaws.

         (b)       The board of directors shall be divided into three classes, Class A, Class B, and Class C, with each class as nearly equal in number as possible. Any inequality among the classes in the number of directors comprising such classes shall not impair the validity of any action taken by the board of directors. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected. Directors in office on the effective date of this Restated Certificate of Incorporation will continue to serve in the class to which they were elected or appointed and for the balance of their respective terms as they existed immediately prior to the effective date of this Restated Certificate of Incorporation.

         (c)       In the event of any increase or decrease in the authorized number of directors, each director then serving shall nevertheless continue as a director

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of the class of which he or she is a member until the expiration of his or her term, or his or her prior death, retirement or resignation.

         (d)       Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director and the directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be elected and qualified. If there are no directors in office, then an election of directors may be held in the manner provided by statute.

         (e)       Vacancies in more than one class of directors shall be filled, and newly created or eliminated directorships shall be apportioned among the three classes of directors, so that the number of directors in each class will be as nearly equal as possible.

Article 7 – Amendment of Certificate of Incorporation

         The corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation.

Article 8 – Compromise or Arrangement with Creditors

         Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provision of 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all of the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation.

Article 9 – Registered Office and Agent

         The address of the registered office of this corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, county of New Castle, and the name of its registered agent at that address is The Corporation Trust Company.

Article 10 – Director’s Liability; Indemnification

         No director of the corporation shall be personally liable to the corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director involving any act or omission of any such director occurring on or after May 14, 1987; provided, however, that the foregoing provision shall not eliminate or limit the liability of directors (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article by the stockholders of the corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of the director of the corporation in respect of any acts or omissions occurring prior to such repeal or modification, or any such limitation existing at the time of such repeal or modification.

         IN WITNESS WHEREOF, executed in the name of Comdial Corporation by its President and its Secretary, who declare, affirm, acknowledge and certify under penalties of perjury, that this their free act and deed and the facts restated herein are true.

Dated: ___________, 2002 COMDIAL CORPORATION

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By:
	Nickolas A. Branica, President

ATTEST:

Paul K. Suijk, Secretary

(Corporate Seal)

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EX-3.2

Exhibit 3.2

SECOND AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF COMDIAL CORPORATION

         The following Second Amended and Restated Certificate of Incorporation: (i) amends and restates the provisions of the Amended and Restated Certificate of Incorporation of Comdial Corporation (the “Corporation”), filed with the Secretary of State of the State of Delaware under the same name on August 27, 2002, and (ii) has been duly proposed by the board of directors of the Corporation and duly adopted by the stockholders of the Corporation in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware under the same name on April 6, 1982.

Article 1 – Name

         The name of the Corporation is:

COMDIAL CORPORATION

Article 2 - Purpose

         The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

Article 3 – Capital Stock

         The aggregate number of shares of capital stock which the corporation has the authority to issue is Five Hundred Two Million (502,000,000), which is divided into two classes as follows:

         Two Million (2,000,000) shares of Preferred Stock (Preferred Stock) with a par value of $10.00 per share, One Million (1,000,000) of which shall be a series designated as Series B Alternate Rate Cumulative Convertible Redeemable Preferred Stock, and

         Five Hundred Million (500,000,000) share of Common Stock (Common Stock) with a par value of $0.01 per share.

         The designations, voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the above classes of stock are as follows:

I. Preferred Stock

         (1)      Issuance in Series.

         Shares of Preferred Stock may be issued in one or more series at such time or times, and for such consideration or considerations as the board of directors may determine. All shares of any one series of Preferred Stock will be identical with each other in all respects, except that shares of one series issued at different times may differ as to dates for which dividends thereon may be cumulative. All series will rank equally and be identical in all respects except as permitted by the following provisions of paragraph 2 of this Division I.

         (2)      Authority of the Board with Respect to Series.

         The board of directors is authorized, at any time and from time to time, to provide for the issuance of the shares of Preferred Stock in one or more series with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as are stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the board of directors, and as are not stated and expressed in this Certificate of Incorporation or any amendment hereto including, but not limited to, determination of any of the following:

         (i)        The number of shares constituting that series and the distinctive designation of that series;

         (ii)        The dividend rate or rates on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, the payment date or dates for dividends and the relative rights of priority, if any, of payment of dividends on shares of that series;

         (iii)        Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights;

         (iv)        Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the board of directors shall determine;

         (v)        Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including that date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

         (vi)        Whether that series shall have a sinking or retirement fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking or retirement fund;

         (vii)        The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series;

         (viii)        Any other preferences, privileges and powers, and relative participating, optional or other special rights, and qualifications, limitations or restrictions of a series, as the board of directors may deem advisable and are not inconsistent with the provisions of this Certificate of Incorporation.

         (3)      Dividends.

         Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment in accordance with their respective preferential and relative rights before any dividends shall be paid or declared and set apart for payment on the outstanding shares of Common Stock with respect to the same dividend period.

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          (4)    Liquidation.

         If upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential and relative amounts (including unpaid cumulative dividends, if any) payable with respect thereto.

         (5)      Reacquired Shares.

         Shares of Preferred Stock which have been issued and reacquired in any manner by the corporation (excluding, until the corporation elects to retire them, shares which are held as treasury shares but including shares redeemed, shares purchased and retired, and shares which have been converted into shares of Common Stock) will have the status of authorized and unissued shares of Preferred Stock and may be reissued.

         (6)      Voting Rights.

         Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the board of directors creating any series of Preferred Stock pursuant to this Division I, the holders of the Preferred Stock shall have no voting power with respect to any matter whatsoever. In no event shall the Preferred Stock be entitled to more than one vote in respect of each share of stock except as may be required by law or by this Certificate of Incorporation.

II. Series B Alternate Rate Cumulative Convertible Redeemable Preferred Stock

         (1)      Designation and Amount.

         The shares of such series shall be designated as the “Series B Alternate Rate Cumulative Convertible Redeemable Preferred Stock” (hereinafter “Series B Preferred Stock”) and the number of shares constituting such series shall be 1,000,000 and no more.

         (2)      Dividends and Distributions.

         (a)        Subject to paragraph (b) of this Section 2, the holders of shares of Series B Preferred Stock, in preference to the holders of shares of the Company’s Common Stock, par value $0.01 per share (“Common Stock”), shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds of the Company legally available for the payment of dividends, quarterly dividends per share payable in cash in the following amounts: $0.125 on the last day of March, $0.125 on the last day of June, $0.125 on the last day of September, and $0.125 on the last day of December in each year (each such date being referred to as a “Quarterly Dividend Payment Date”) commencing on the first Quarterly Dividend Payment Date which is after the date of issue of such shares of Series B Preferred Stock; provided, however, that with respect to such first Quarterly Dividend Payment Date, the holders of shares of Series B Preferred Stock shall be entitled pursuant to this paragraph (a) to receive the pro rata portion of such quarterly dividend on the basis of the number of days elapsed between the date of issue and the first Quarterly Dividend Payment Date. Such dividends shall be cumulative and shall accrue from the date of issue until paid in cash.

         (b)        Alternatively, in lieu of paying a dividend on the Series B Preferred Stock in cash, the Company shall have the option of paying any such dividend, when paid, in shares of the Company’s Common Stock at a rate equal to two times the cash dividend rate provided in Section 2(a) above, and in any such case the value of shares of Common Stock paid as a dividend on the Series B Preferred Stock shall be determined as provided for in the following paragraphs:

         If the Company elects to issue the dividend in shares of Common Stock rather than cash, the Company shall issue the holder the number of shares of Common Stock having an aggregate Current Market Value equal to two times the amount of the dividend payable to the holder had the Company elected that the dividend be paid in cash, provided, however, the Company may not elect to issue dividends in shares of Common Stock if such issuance would result in the holders of Series B Preferred Stock owning an amount of the outstanding common stock of the Company on an as-converted basis that would require the Company to obtain stockholder approval under NASDAQ Rule 4350(i). The “Current Market Value” for a share of the Common Stock shall be determined as follows:

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           (i)     if the Common Stock shall be listed (or admitted to unlisted trading privileges) on any single national securities exchange, then the Current Market Value shall be computed on the basis of the last reported sale price of the Common Stock on such exchange on the third Business Day prior to the Quarterly Dividend Payment Date, or if no such sale shall have occurred on such day, then on the next Business Day prior thereto on which day a sale occurred; or

          (ii)     if the Common Stock shall not be so listed (or admitted to unlisted trading privileges) and bid and asked prices therefor in the over-the-counter market shall be reported by NASDAQ, including the Nasdaq National Market and the Nasdaq SmallCap Market, then the Current Market Value shall be the average of the closing bid and asked prices for the five trading days ending on the third Business Day prior to the Quarterly Dividend Payment Date; or

          (iii)     if the Common Stock shall be listed (or admitted to unlisted trading privileges) on more than one national securities exchange or one or more national securities exchanges and in the over-the-counter market, then the Current Market Value shall, if different as a result of calculation under the applicable method(s) described above in (i) and (ii) above, be deemed to be the higher number calculated in connection therewith; or

          (iv)     if the shares of Common Stock are traded over the counter, but not on any national securities exchange and not in the NASDAQ National Market System or the Nasdaq SmallCap Market System, then the Current Market Value shall be the average of the mean bid and asked prices per share for the five trading days ending on the third Business Day prior to the Quarterly Dividend Payment Date, as reported by Pink Sheets LLC, or an equivalent generally accepted reporting service; or

          (v)     if the Common Stock shall not be so listed, admitted to unlisted trading privileges, or traded over the counter, and such bid and asked prices shall not be so reported, then the Current Market Value shall be the average of the mean bid and asked prices per share for the last ten trading days on which bid and asked prices were reported prior to the third Business Day prior to the Quarterly Dividend Payment Date.

         The Company shall not be required to issue fractional shares of Common Stock in connection with its election to pay the dividend in shares of Common Stock. If any fraction of a share of Common Stock would be issuable upon the payment of the dividend (or any specified portion thereof), the Company shall pay an amount in cash equal to the product of (a) such fraction and (b) the Current Market Value of a share of the Common Stock, determined as set forth above.

         (c)        Dividends paid on shares of Series B Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis to all such shares of Series B Preferred Stock at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series B Preferred Stock entitled to receive payments of a dividend declared thereon, which record date shall be no more than 60 days nor less than ten days prior to the date fixed for the payment thereof.

         (d)        The holders of shares of Series B Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided in this Certificate of Designation of Series B Alternate Rate Cumulative Convertible Redeemable Preferred Stock.

         (3)      Required Approval.

         The shares of Series B Preferred Stock shall not have any voting powers, either general or special, except as required by applicable law and shall have approval rights as follows:

         (a)        Without the approval of the holders of at least 67% of the shares of Series B Preferred Stock at the time outstanding, the Company shall not amend its Certificate of Incorporation to, adopt a certificate of designation to, or otherwise (i) create any class of stock or issue any series of Preferred Stock or any other equity security ranking prior to or in parity with the Series B Preferred Stock as to dividends or upon liquidation; provided, however, that such approval shall not be required if the creation or issuance of the class or series of equity securities ranking prior to or in parity with the Series B Preferred Stock as to dividends or upon liquidation is created or issued in an Approved Transaction, as defined in Section 8 herein; or (ii) alter or change any of the preferences, privileges, rights or powers of the holders of the Series

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         B Preferred Stock so as to affect adversely such preferences, privileges, rights or powers.

         (b)       In the event that any four consecutive quarterly dividends upon the Series B Preferred Stock which the holders of the Series B Preferred Stock are entitled to receive hereunder shall be in arrears and unpaid either in cash or in-kind, the holders of Series B Preferred Stock shall have the exclusive and special right, voting separately as a class, to elect two (2) members of the Board of Directors or such greater number of members as is necessary to equal at least 20% of the total number of members of the Board of Directors at all times thereafter.

         (4)      Certain Restrictions.

         Whenever quarterly dividends payable on shares of Series B Preferred Stock pursuant to the terms of Section 2 are in arrears, then thereafter and until all accrued and unpaid dividends on shares of Series B Preferred Stock outstanding shall have been paid in full or declared and set apart for payment, the Company shall not declare or pay dividends on, or make any other distributions on any shares of any series or class other than Series B Preferred Stock or purchase, redeem or otherwise acquire any shares of any series or class other than Series B Preferred Stock; provided, however, that such restrictions shall be deemed to be waived by the holders of the outstanding shares of the Series B Preferred Stock if the declaration or payment of dividends or distributions, or the repurchase, redemption or other acquisition, is with regard to a series or class of capital stock issued in an Approved Transaction.

         (5)      Redemption.

         (a)       The outstanding shares of Series B Preferred Stock may be redeemed at the option of the Company, in whole or in part, at any time upon not less than 30 days nor more than 90 days prior written notice to all holders of record of shares of Series B Preferred Stock to be so redeemed, at a redemption price equal to all accumulated but unpaid dividends to and including the date fixed for redemption of such shares (the “Redemption Date”) plus an amount (the “Applicable Amount”) equal to (i) during the four calendar years after the year of issuance of the Series B Preferred Stock, $10.00 per share or (ii) during each calendar year after the fourth year, an amount equal to the Applicable Amount in the preceding year plus $0.50 per share; provided that the redemption price per share for any transaction which results in the total number of shares of Series B Preferred Stock that have been redeemed (including the shares redeemed in such transaction) equaling at least ten percent (10%) of the total number of shares of Series B Preferred Stock which were originally issued, and for all subsequent transactions, shall be the same price as was in effect during the year preceding the transaction which results in the redemption of at least ten percent (10%) of the originally issued Series B Preferred Stock. Subject to delivery of certificates for the shares to be redeemed, the Company shall pay the Applicable Amount plus all accumulated but unpaid dividends on the Redemption Date.

         (b)       Unless default shall be made in the payment in full of the redemption price and any accumulated and unpaid dividends, dividends on the shares of Series B Preferred Stock called for redemption shall cease to accumulate on the Redemption Date, and all rights of the holders of such shares as stockholders of the Company by reason of the ownership of such shares shall cease on the Redemption Date, except the right to receive the amount payable upon redemption of such shares on presentation and surrender of the respective certificates representing such shares. After the Redemption Date, such shares shall not be deemed to be outstanding and shall not be transferable on the books of the Company except to the Company.

         (c)       At any time on or after the Redemption Date, the respective holders of record of shares of Series B Preferred Stock to be redeemed shall be entitled to receive the redemption price upon actual delivery to the Company of certificates for the shares to be redeemed, such certificates, if required by the Company, to be properly stamped for transfer and duly endorsed in blank or accompanied by proper instruments of transfer thereof duly executed in blank.

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          (6)    Liquidation, Dissolution or Winding-Up.

         In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of the Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall be made to the holders of any other class or series of capital stock of the Company, an amount equal to $10.00 per share plus an amount equal to all dividends accrued thereon to and including the date of payment; provided, however, the holders of the Series B Preferred Stock shall be deemed to have waived such priority of payment with regard to another class or series of capital stock issued in an Approved Transaction.

         (7)      Conversion.

         (a)       Conversion Ratio. Each share of Series B Preferred Stock shall be convertible at any time at the option of the holder thereof, into shares of Common Stock. Subject to the other terms of this Section 7, the number of shares of Common Stock deliverable upon conversion of one share of Series B Preferred Stock shall be one and one-half (1.5) shares of Common Stock, provided, however, in the event that while shares of Series B Preferred Stock are held by Bank of America, N.A. or a nominee thereof the Company issues new shares of equity securities to investors for new funding and a portion of the proceeds is used to make a reduction in the outstanding principal amount of the Company’s Term Loan, the conversion ratio shall be adjusted as follows:

Term LoanPaydown	Conversion Ratio		Pre Conversion Equity			No. Shares of Common
$0		1.5:1		16.30	%		1,500,000
$1.0 million		1.4:1		15.22	%		1,400,000
$1.5 million		1.3:1		14.13	%		1,300,000
$2.0 million		1.2:1		13.04	%		1,200,000
$2.5 million		1.0:1		10.87	%		1,000,000
$3.0 million		0.5:1		5.43	%		500,000

For the purposes of this Section 7(a), the “Term Loan” shall mean the term loan payable to Bank of America, N.A. in the original principal amount of $4,903,874.69, due March 31, 2003, evidenced by a Term Loan Note dated March 6, 2002, as such term loan note may be amended, modified, renewed or replaced.

         (b)       Exercise of Conversion Privilege. Each holder of outstanding shares of Series B Preferred Stock may exercise the conversion right provided in paragraph (a) above as to all or any portion of the shares he holds by delivering to the Company during regular business hours, at the principal office of the Company or at such other place as may be designated in writing by the Company, the certificate or certificates for the shares to be converted, duly endorsed or assigned in blank or endorsed or assigned to the Company (if required by it), accompanied by written notice stating that the holder elects to convert such shares and stating the name or names (with address and applicable social security or other tax identification number) in which the certificate or certificates for shares of Common Stock are to be issued. Conversion shall be deemed to have been effected on the date (the “Conversion Date”) when such delivery is made. As promptly as practicable thereafter the Company shall issue and deliver to or upon the written order of such holder, at such office or other place designated by the Company, a certificate or certificates for the number of shares of Common Stock to which he is entitled and a check or other order for the payment of cash due with respect to any fraction of a share, as provided in paragraph (c) below. The person in whose name the certificate or certificates for shares of Common Stock are to be issued shall be deemed to have become a shareholder of record on the Conversion Date, unless the transfer books of the Company are closed on that date, in which event he shall be deemed to have become a shareholder of record on the next succeeding date on which the transfer books are open; but the Conversion Price shall be that in effect on the Conversion Date.

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          (c)       No Fractional Shares. The Company shall not be required to issue fractional shares of Common Stock upon conversion of shares of Series B Preferred Stock. If more than one share of Series B Preferred Stock shall be surrendered for conversion at any time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the total number of shares of Series B Preferred Stock so surrendered. If any fractional interest in a share of Common Stock would be deliverable upon conversion, the Company shall make an adjustment therefor in cash based on the Current Market Value of one share of Common Stock on the Conversion Date. The “Current Market Value” for purposes of this paragraph shall be determined as set forth in Section 2(b), except that each reference to “Quarterly Dividend Payment Date” in Section 2(b) shall mean “Conversion Date” for purposes of this paragraph.

         (d)       Taxes Payable on Conversion. The issuance of shares of Common Stock on conversion of outstanding shares of Series B Preferred Stock shall be made by the Company without charge for expenses or for any tax in respect of the issuance of such shares of Common Stock, but the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in any name other than that of the holder of record on the books of the Company of the outstanding shares of Series B Preferred Stock converted, and the Company shall not be required to issue or deliver any certificate for shares of Common Stock unless and until the person requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

         (e)       Conversion Price Adjustments. The Conversion Price of the Series B Preferred Stock shall be subject to adjustment from time to time as follows:

                  (i)         (A)     If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share that is less than the Market Price in effect immediately prior to the issuance of such Additional Stock, the Conversion Price shall forthwith (except as otherwise provided in this clause (i)) be adjusted as to equal the price determined by the following formula:

NP =	OP         x         (P x N) + C
	(P x (N + n))

where

NP =	new Conversion Price,
OP =	old Conversion Price,
P   =	Market Price in effect immediately prior to the issuance of Additional Stock,
N   =	the number of shares of Common Stock outstanding immediately prior to the issuance of Additional Stock (including for this purpose the number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock at the Conversion Price in effect immediately prior to such issuance),
C   =	the aggregate consideration to be received by the Company for the Additional Stock, and
n   =	the number of shares of Additional Stock to be issued.

The “Market Price” shall mean the Current Market Value as defined in Section 2(b) hereof, with the date of measurement under sub-clauses (i) to and including (v) of Section 2(b) being, for the purposes of this Section 7(e), the third Business Day prior to the Issuance Date of such Additional Stock rather than the third Business Day prior to the Quarterly Dividend Payment Date.

                              (B)         No adjustment of the Conversion Price for the Series B Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments that are thereby not required to be made shall be carried forward and shall be taken into account in any subsequent adjustment. Except to the limited extent provided for in Subsection 7(e)(i)(E)(3), no adjustment of the Conversion Price pursuant to this Subsection 7(e)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment.

                              (C)         In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before

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deducting any reasonable discounts , commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof.

                               (D)         In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment.

                               (E)         In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (which are not excluded from the definition of Additional Stock), the following provisions shall apply:

                                              (1)         subject to subparagraph (4) below, the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Subsections 7(e)(i)(C) and 7(e)(i)(D)), if any, received by the Company upon the issuance of such options or rights plus the additional consideration, if any, to be received by the Company upon the exercise of such options or rights for the Common Stock covered thereby;

                                              (2)         subject to subparagraph (4) below, the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and the subsequent conversion or exchange thereof shall be deemed to have been issued at the time such convertible or exchangeable securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such convertible or exchangeable securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Subsections 7(e)(i)(C) and 7(e)(i)(D));

                                              (3)         in the event of any increase in the number shares of Common Stock deliverable upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Conversion Price then in effect shall forthwith be readjusted to such Conversion Price as would have been obtained had the adjustment that was made upon the issuance of such options, rights or securities not converted prior to such change or the options or rights related to such securities not converted prior to such change been made upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise of any such options or rights or the conversion or exchange of such securities; and

                                              (4)         upon the expiration of any such options or rights, the termination of any such right s to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have been obtained had the adjustment that was made upon the issuance of such options, rights or securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities.

                  (ii)       “Additional Stock” shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Subsection 7(e)(i)(E)) on any date (“Issuance Date”), other than:

                              (A)         Common Stock issued pursuant to a transaction described in Subsection 7(e)(iii) hereof,

                              (B)         Common Stock issuable or issued to directors, employees or consultants of the Company directly or pursuant to a stock option or other plan,

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                              (C)         Common Stock issued or issuable upon conversion of any outstanding Series B Preferred Stock, and

                              (D)         Common Stock issued in an Approved Transaction.

                  (iii)      If the Company should at any time or from time to time after the Issuance Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), the applicable Conversion Price of the Series B Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series B Preferred Stock shall be increased in proportion to such increase of outstanding shares.

                  (iv)      If the number of shares of Common Stock outstanding at any time after the Issuance Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, following the record date of such combination or reverse stock split, the applicable Conversion Price of the Series B Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series B Preferred Stock shall be decreased in proportion to such decrease in outstanding shares.

                  (v)      In case of any consolidation or merger of the Company with or into another corporation or the conveyance of all or substantially all of the assets of the Company to another corporation, adequate provision shall be made by the Company or by the successor or purchasing business entity so that each share of Series B Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock deliverable upon conversion of such Series B Preferred Stock immediately before the effectiveness of such consolidation, merger or conveyance, would have been entitled upon such consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to changes in and other adjustment of the Conversion Price of the Series B Preferred Stock) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series B Preferred Stock.

         (f)       Other Distributions. If the Company shall declare a distribution payable to holders of Common Stock in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights not referred to in Subsection 7(e) (iii), then, in each such case for the purpose of this Subsection 7(f), the holders of the Series B Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Company into which their shares of Series B Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution.

         (g)       Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination, merger, sale of assets or other transaction provided for elsewhere in this Section 7), provision shall be made so that the holders of the Series B Preferred Stock shall thereafter be entitled to receive upon conversion of the Series B Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion immediately before the effectiveness of such recapitalization would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 7 with respect to the rights of the holders of the Series B Preferred Stock after the recapitalization to the end that the provisions of this Section 7 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series B Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.

         (h)       No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of

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assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 7 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series B Preferred Stock against impairment.

         (i)       Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price of the Series B Preferred Stock pursuant to this Section 7, the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series B Preferred Stock, by first class mail, postage prepaid, a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement setting forth (A) the consideration received or to be received by the Company for any Additional Stock, (B) the Conversion Price then in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of the Series B Preferred Stock.

         (j)       Notices of Record Date. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each holder of Series B Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right.

         (k)       Notices. Any notice required by the provisions of this Section 7 to be given to the holder of shares of Series B Preferred Stock shall be deemed given when personally delivered to such holder or five business days after the same has been deposited in the United States mail, certified or registered mail, return receipt requested, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Company.

         (l)       Effect of Conversion After Certain Record Dates. If any shares of Series B Preferred Stock are converted into shares of Common Stock after the record date for the happening of any of the events described in subparagraphs (i), (ii) or (iii) of Section 7(e) but before the happening of such event the Company may defer, until the happening of such event, (i) issuing to the holder of shares of Series B Preferred Stock so converted the shares of Common Stock which he is entitled to receive because of the adjustments required pursuant to any such subparagraph and (ii) paying to such holder any cash in lieu of a fractional share pursuant to this Section 7.

         (m)       Reservation of Stock Issuable on Conversion. Shares of Common Stock issued on conversion of shares of Series B Preferred Stock shall be issued as fully paid shares and shall be nonassessable by the Company. The Company shall, at all times, reserve and keep available for the purpose of effecting the conversion of the outstanding shares of Series B Preferred Stock such number of its duly authorized shares of Common Stock as shall be sufficient to effect the conversion of all of the outstanding shares of Series B Preferred Stock.

         (8)      Approved Transactions.

         As used in Sections 3, 4, 6 and 7 of this Certificate, the term “Approved Transaction” shall mean any transaction entered into by the Company which results in the issuance of shares of the Company’s capital stock (or securities convertible into or exchangeable or exercisable for shares of capital stock) to a third party so long as such transaction shall have been approved or consented to, in either case in writing, by a majority of the holders of the outstanding shares of Series B Preferred Stock. The approval of or consent to such transaction shall be deemed to have been given by such holders of a majority of the Series B Preferred Stock if such holders shall have received a Third Party Opinion customary in form and substance that the transaction is fair to the Company from a financial point of view not less than five business days prior to the closing of such transaction. The term “Third Party Opinion” shall mean a fairness opinion addressed to the Company’s Board of Directors and the holders of a majority of the Series B Preferred Stock from a nationally recognized investment banking firm selected by the Company which selection shall be subject to the approval of the holders of a majority of the Series B Preferred Stock.

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          (9)    Transfer Restrictions.

         The holder of any shares of Series B Preferred Stock shall not transfer or purport to transfer any such shares unless he shall have given to the Company, through its Secretary, at least fifteen (15) business days’ written notice of the proposed transfer, the number of shares proposed to be transferred, the price at which the proposed transfer is to be made, and the name of the prospective transferee. During such fifteen (15) business days, the Company shall have the sole option to exercise its right of redemption consistent with the terms of Section 5 of this Certificate.

III. Common Stock

         (1)      Dividends.

         Subject to the preferential rights of the Preferred Stock, the holders of the Common Stock are entitled to receive, to the extent permitted by law, such dividends as may be declared from time to time by the board of directors.

         (2)      Liquidation.

         In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of Preferred Stock, holders of Common Stock shall be entitled to receive all of the remaining assets of the corporation of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. The board of directors may distribute in kind to the holders of Common Stock such remaining assets of the corporation or may sell, transfer or otherwise dispose of all or any part of such remaining assets to any other corporation, trust or other entity and receive payment therefor in cash, stock or obligations of such other corporations, trust or other entity, or combination thereof in kind to holders of Common Stock. The merger or consolidation of the corporation into or with any other corporation, or the merger of any other corporation into it, or any purchase or redemption of shares of stock of the corporation of any class, shall not be deemed to be a dissolution, liquidation or winding up of the corporation for the purposes of this paragraph.

         (3)      Voting Rights.

         Except as may be otherwise required by law or this Certificate of Incorporation, each holder of Common Stock has one vote in respect of each share of stock held by him of record on the books of the corporation on all matters voted upon by the stockholders.

Article 4 – Existence

         The corporation is to have perpetual existence.

Article 5 – Amendment of Bylaws

         In furtherance and not in limitation of the powers conferred by statute, the board of directors is authorized to adopt, amend and repeal the Bylaws of this corporation.

Article 6 – Directors

         (a)       The number of directors of the corporation shall be fixed from time to time in the manner set for the in the Bylaws.

         (b)       The board of directors shall be divided into three classes, Class A, Class B, and Class C, with each class as nearly equal in number as possible. Any inequality among the classes in the number of directors comprising such classes shall not impair the validity of any action taken by the board of directors. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected. Directors in office on the effective date of this Restated Certificate of Incorporation will continue to serve in the class to which they were elected or appointed and for the balance of their respective terms as they existed immediately prior to the effective date of this Restated Certificate of Incorporation.

         (c)       In the event of any increase or decrease in the authorized number of directors, each director then serving shall nevertheless continue as a director

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of the class of which he or she is a member until the expiration of his or her term, or his or her prior death, retirement or resignation.

         (d)       Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director and the directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be elected and qualified. If there are no directors in office, then an election of directors may be held in the manner provided by statute.

         (e)       Vacancies in more than one class of directors shall be filled, and newly created or eliminated directorships shall be apportioned among the three classes of directors, so that the number of directors in each class will be as nearly equal as possible.

Article 7 – Amendment of Certificate of Incorporation

         The corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation.

Article 8 – Compromise or Arrangement with Creditors

         Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provision of 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all of the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation.

Article 9 – Registered Office and Agent

         The address of the registered office of this corporation in the State of Delaware is 9 East Loockerman Street, in the City of Dover, county of Kent, and the name of its registered agent at that address is National Registered Agents, Inc.

Article 10 – Director’s Liability; Indemnification

         No director of the corporation shall be personally liable to the corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director involving any act or omission of any such director occurring on or after May 14, 1987; provided, however, that the foregoing provision shall not eliminate or limit the liability of directors (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article by the stockholders of the corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of the director of the corporation in respect of any acts or omissions occurring prior to such repeal or modification, or any such limitation existing at the time of such repeal or modification.

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         IN WITNESS WHEREOF, executed in the name of Comdial Corporation by its President and its Secretary, who declare, affirm, acknowledge and certify under penalties of perjury, that this their free act and deed and the facts restated herein are true.

Dated:   November 7, 2002	COMDIAL CORPORATION
	By
		Nickolas A. Branica, President

ATTEST:

Paul K. Suijk, Secretary

(Corporate Seal)

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EX-99.1

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report of Comdial Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nickolas A. Branica, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

         (1)      The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (2)      The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dated: November 14, 2002	By:	/s/ NICKOLAS A. BRANICA
		Nickolas A. Branica President and Chief Executive Officer

This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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EX-99.2

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report of Comdial Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul K. Suijk, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

         (1)      The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (2)      The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dated: November 14, 2002	By:	/s/ PAUL K. SUIJK
		Paul K. Suijk Senior Vice President and Chief Financial Officer

This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

29

EX-99.3

Exhibit 99.3

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report on Form 10-Q of Comdial Corporation (the “Company”) for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof, I, Nickolas A. Branica, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002, that:

         (1)      I have reviewed this quarterly report on Form 10-Q of Comdial Corporation;

         (2)      Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

         (3)      Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in al material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; and

         (4)      The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

         (a)      designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

         (b)      evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

         (c)      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

         (5)      The Company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

         (a)      all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

         (b)      any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

         (6)      The Company’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: November 14, 2002	By:	/s/ NICKOLAS A. BRANICA
		Nickolas A. Branica President and Chief Executive Officer

         This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

30

EX-99.4

Exhibit 99.4

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report on Form 10-QSB of Internet Cable Corporation (the “Company”) for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof, I, Paul K. Suijk, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002, that:

         (1)      I have reviewed this quarterly report on Form 10-QSB of Comdial Corporation;

         (2)      Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

         (3)      Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in al material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; and

         (4)      The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

         (a)      designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

         (b)      evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

         (c)      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

         (5)      The Company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

         (a)      all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

         (b)      any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

         (6)      The Company’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: November 14, 2002	By:	/s/ PAUL K. SUIJK
		Paul K. Suijk Senior Vice President and Chief Financial Officer

         This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.