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 June 30, 2003

OR

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

For the transition period from              to                

Commission file number: 0-9023

COMDIAL CORPORATION

(Exact name of Registrant as specified in its charter)

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

106 Cattlemen Road, Sarasota, Florida 34232

(Address of principal executive offices)                 (Zip Code)

Registrant’s telephone number, including area code: (941) 554-5000

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

Yes      X                    No           

The number of shares outstanding of each of the issuer’s classes of Common Stock, as of August 11, 2003 was 8,913,866 shares, all of one class (Common Stock), par value $0.01 per share.

COMDIAL CORPORATION AND SUBSIDIARIES

INDEX

	PAGE
PART I—FINANCIAL INFORMATION
ITEM 1:    Financial Statements
Consolidated Statements of Operations for the Three and Six Months ended June 30, 2003 and 2002 (unaudited)	3
Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002	4
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2003 and 2002 (unaudited)	5
Notes to Consolidated Financial Statements (unaudited)	6
ITEM 2:    Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
ITEM 3:    Quantitative and Qualitative Disclosures about Market Risks	17
ITEM 4:    Controls and Procedures	17
PART II—OTHER INFORMATION
ITEM 1:    Legal Proceedings	19
ITEM 2:    Recent Sales of Unregistered Securities	19
ITEM 4:    Submission of Matters to a Vote of Security Holders	19
ITEM 6:    Exhibits and Reports on Form 8-K	20

2

COMDIAL CORPORATION AND SUBSIDIARIES

PART 1.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Consolidated Statements of Operations—(Unaudited)

	Three Months Ended						Six Months Ended
In thousands, except per share amounts	June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Net sales	$	12,974		$	12,959		$	25,290		$	25,284
Cost of goods sold		7,811			8,422			15,731			16,310
Gross profit		5,163			4,537			9,559			8,974
Operating expenses
Selling, general & administrative		4,136			5,397			8,128			10,420
Engineering, research & development		887			1,431			1,832			3,047
Impairments of long-lived assets		365			—			365			—
Total operating expenses		5,388			6,828			10,325			13,467
Operating loss		(225	)		(2,291	)		(766	)		(4,493	)
Other expense (income)
Interest expense, net		819			737			1,639			1,174
Gain on senior debt restructuring		—			—			—			(9,000	)
Gain on other liability restructurings		—			(914	)		—			(3,816	)
Gain on lease renegotiation		—			—			—			(2,834	)
(Gain) loss on sale of assets		—			325			(3	)		328
Miscellaneous expense (income), net		18			(391	)		(11	)		(428	)
Income (loss) before income taxes		(1,062	)		(2,048	)		(2,391	)		10,083
Income tax expense		—			—			—			—
Net income (loss)		(1,062	)		(2,048	)	$	(2,391	)		10,083
Preferred stock dividends		—			(125	)		—			(159	)
Net income (loss) applicable to common stock	$	(1,062	)	$	(2,173	)	$	(2,391	)	$	9,924
Earnings (loss) per share applicable to common stock:
Basic	$	(0.12	)	$	(3.52	)	$	(0.28	)	$	16.10
Diluted	$	(0.12	)	$	(3.52	)	$	(0.28	)	$	13.63
Weighted average shares outstanding:
Basic		8,617			618			8,567			616
Diluted		8,617			618			8,567			741

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

3

COMDIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

In thousands, except per share amounts	June 30, 2003 (Unaudited)			December 31, 2002
Assets
Current assets
Cash and cash equivalents	$	1,425		$	3,166
Restricted cash		1,000			—
Accounts receivable (less allowance for doubtful accounts: 2003 – $470; 2002 – $700)		7,948			8,284
Inventories		5,648			6,083
Prepaid expenses and other current assets		289			1,621
Total current assets		16,310			19,154
Property and equipment – net		3,423			4,194
Goodwill – net		3,375			3,375
Capitalized software development costs – net		4,345			4,729
Deferred financing costs – net		4,705			5,603
Other assets		3,179			3,565
Total assets	$	35,337		$	40,620
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities
Accounts payable	$	5,299		$	8,396
Accrued payroll and related expenses		1,292			1,310
Accrued promotional allowances		1,729			1,252
Other accrued liabilities		1,484			1,688
Current maturities of long-term debt		515			644
Total current liabilities		10,319			13,290
Long-term debt		9,366			9,604
Long-term debt to related parties		7,012			7,012
Pension obligations		8,241			8,241
Other long-term liabilities		1,939			2,134
Total liabilities		36,877			40,281
Stockholders’ equity (deficit)
Convertible preferred stock, $10.00 par value, $10 per share liquidation preference (Authorized 2,000 shares; issued and outstanding: 2003 – 0; 2002 – 0)		—			—
Common stock, $0.01 par value (Authorized 60,000 shares; issued and outstanding 2003 – 8,861; 2002 – 8,515)		675			671
Paid-in capital		133,795			133,287
Accumulated deficit		(127,769	)		(125,378	)
Accumulated other comprehensive loss – pension obligations		(8,241	)		(8,241	)
Total stockholders’ equity (deficit)		(1,540	)		339
Total liabilities and stockholders’ equity (deficit)	$	35,337		$	40,620

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

4

COMDIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows—(Unaudited)

	Six Months Ended
In thousands	June 30, 2003			June 30, 2002
Cash flows from operating activities:
Net income (loss)	$	(2,391	)	$	10,083
Adjustments to reconcile net income (loss) to operating cash flows
Depreciation and amortization		2,185			3,044
Impairments of long-lived assets		365			—
Amortization of deferred financing costs		1,070			—
Accretion of discount on bridge notes		—			143
Bad debt (recoveries) expense		(65	)		107
Stock compensation expense		—			64
Inventory provision		449			—
Gain on debt and other liability restructurings		—			(12,650	)
Gain on lease renegotiation		—			(2,834	)
(Gain) loss on sale of assets		(3	)		328
Changes in working capital components, net of effects from purchase of subsidiary:
Accounts receivable		401			3,742
Inventory		(14	)		2,738
Prepaid expenses and other assets		1,455			(628	)
Accounts payable		(3,202	)		(3,302	)
Other liabilities		60			(2,543	)
Net cash provided by (used in) operating activities		310			(1,708	)
Cash flows from investing activities:
Proceeds from sale of assets		3			256
Purchase of subsidiary, net of cash acquired		(15	)		—
Capital expenditures		(48	)		(25	)
Capitalized software additions		(636	)		(318	)
Net cash used in investing activities		(696	)		(87	)
Cash flows from financing activities:
Proceeds from issuance of bridge notes		—			2,250
Proceeds from issuance of common stock		12			—
Net repayments under revolver agreement		—			(250	)
Principal payments on notes payable		(129	)		(184	)
Principal payments on capital lease obligations		(238	)		(240	)
Increase in restricted cash		(1,000	)		—
Net cash (used in) provided by financing activities		(1,355	)		1,576
Net decrease in cash and cash equivalents		(1,741	)		(219	)
Cash and cash equivalents at beginning of period		3,166			1,239
Cash and cash equivalents at end of period	$	1,425		$	1,020
Supplemental information—Cash paid during the period for:
Interest	$	340		$	905
Interest to related parties		249			—
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Common stock issued in connection with acquisition	$	500		$	—
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		—			1,789
Accrued dividends on preferred stock		—			159

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

5

COMDIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2003—(Unaudited)

NOTE A.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited 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 six months ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.

The balance sheet at December 31, 2002, has been derived from the audited financial statements at that date, 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 for the year ended December 31, 2002.

Accounting For Stock-Based Compensation

Comdial accounts for stock-based compensation using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of Financial Accounting Standard Board Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:

	Three Months Ended June 30,						Six Months Ended June 30,
In thousands except per share amounts	2003			2002			2003			2002
Net (loss) income: As reported	$	(1,062	)	$	(2,048	)	$	(2,391	)	$	10,083
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		253			132			334			133
Pro forma	$	(1,315	)	$	(2,180	)	$	(2,725	)	$	9,950
Basic (loss) earnings per share:
As reported	$	(0.12	)	$	(3.31	)	$	(0.28	)	$	16.36
Pro forma	$	(0.15	)	$	(3.53	)	$	(0.32	)	$	16.15
Diluted (loss) earnings per share:
As reported	$	(0.12	)	$	(3.31	)	$	(0.28	)	$	13.63
Pro forma	$	(0.15	)	$	(3.53	)	$	(0.32	)	$	13.43

Amortization Of Deferred Financing Costs

In connection with the private placements in late 2002, Comdial issued 5.3 million warrants. These warrants, which were valued at $4.4 million using the Black Scholes method, and $1.8 million of legal and professional were recorded as deferred financing costs and amortized over the term of the private placement notes. During the three and six months ended June 30, 2003, $0.5 million and $1.1 million, respectively, were amortized and are included in interest expense in the consolidated statements of operations.

NOTE B.    SOUNDPIPE ACQUISITION

On June 6, 2003, Comdial Acquisition Corp. (“CAC”), a Delaware corporation and a wholly-owned subsidiary of Comdial, completed the acquisition of substantially all of the assets of Soundpipe Inc. (“Soundpipe”), a privately held Delaware corporation with its sole office in Santa Clara, California. Soundpipe was primarily engaged in the design and development of telecommunications equipment utilizing voice over Internet Protocol (VoIP) technology. The assets acquired include all of Soundpipe’s intellectual property, including, but not limited to equipment prototypes, software source code and several patent applications and trade secrets, and certain physical assets including computer equipment and office furnishings.

The acquisition involved the issuance of a total of 250,000 unregistered shares of the common stock of Comdial, par value $0.01 (the “Stock”), the payment of $15,000 in cash to East Peak Advisors LLC, advisors to Soundpipe, the payment of $20,000 in legal fees incurred by Soundpipe in the transaction, and the assumption of certain specified operating liabilities.

6

CAC also extended offers of employment to eight then current or former employees of Soundpipe, and issued a total of 500,000 options to acquire the common stock of Comdial. Included in the foregoing, CAC has entered into one year employment agreements with the three principal founders of Soundpipe and issued a total of 330,000 of the aforementioned stock options pursuant to those employment agreements. In addition to the acquisition of the assets of Soundpipe, CAC also assumed certain executory contracts of Soundpipe, including certain software licenses and Soundpipe’s office lease.

Comdial accounted for the acquisition in accordance with Financial Accounting Standards Board Statement No. 141, Business Combinations (“Statement 141”). The acquisition was measured on the basis of the fair values exchanged. The Company acquired current assets of with an estimated fair value of $12,900 and property and equipment with an estimated fair value of $61,000. Comdial assumed certain operating liabilities with an estimated fair value of $120,000 and issued 250,000 shares of common stock which were valued at the closing stock price on June 6, 2003 of $2.00 per share, for a fair value of $500,000. To determine the fair value of the acquired technology, Comdial measured the projected discounted net cash flows for the next two years and estimated that the fair market value of the technology significantly exceeded the cost of the acquisition. In accordance with Statement 141, since the total fair value of assets acquired and liabilities assumed exceeded the total cost of the acquisition (the “excess”), the excess was reduced from the fair value assigned to the purchased technology. Consequently, the amount assigned to the acquired technology was $546,000 and is reported in capitalized software development costs in the accompanying consolidated balance sheet.

Prior to the Soundpipe acquisition, Comdial had two development projects that had reached technological feasibility and software development costs were being capitalized. As a result of the Soundpipe acquisition, management reviewed all current development projects in process and, in order to maximize benefits from development funds expended, placed emphasis on the Soundpipe technology acquired. Therefore, management decided to discontinue these two historical Comdial development projects. The software that had been developed is not expected to be used in any future product development and will not generate any future cash flows. As a result, the amounts that had been capitalized related to those two projects of $365,000 were written off in June 2003 and are recorded as impairments of long-lived assets in the consolidated income statement.

NOTE C.    INVENTORIES

Inventories, net of allowances, consist of the following:

In thousands	June 30, 2003		December 31, 2002
Finished goods	$	5,069	$	5,341
Materials and supplies		579		742
Total	$	5,648	$	6,083

Comdial records provisions for product obsolescence, which reduce gross margin. Allowances for inventory obsolescence amounted to $1.4 million and $1.1 million as of June 30, 2003 and December 31, 2002, respectively. Changes in reserves will be dependent on management’s estimates of the recoverability of costs from inventory.

As of June 30, 2003, the Company purchases substantially all of its finished goods from four outsource manufacturers.

NOTE D.    PRODUCT WARRANTY LIABILITY

In most cases, we provide a two-year warranty to our customers, including repair or replacement of defective equipment. Our outsource manufacturing partners are responsible for the first year of the warranty repair work. We are using a third party contractor to perform much of this warranty. We provide for the estimated cost of product warranties at the time the revenue is recognized. We calculate our warranty liability based on historical product return rates and estimated average repair costs. While we engage in various product quality programs and processes, our warranty obligation may be affected by product failure rates, the ability of our outsource manufacturers to satisfy warranty claims and the cost of warranty repairs charged by the third party contractor. The outcome of these items could differ from our estimates and revisions to the warranty estimates could be required. The table below summarizes the changes in the Company’s product warranty liability for the six months ended June 30, 2003:

7

In thousands
Warranty liability at January 1, 2003	$	800
Repair costs paid during 2003		(252	)
Reductions for changes in accruals for warranties issued prior to 2003		(403	)
Additions for warranties issued during 2003		394
Warranty liability at June 30, 2003	$	539

During the six months ended June 30, 2003, the Company recorded a decrease in its warranty liability. The reduction to the warranty liability was due to several factors, including a reduction in product repair return rates and a reduction in the price charged by the third party contractor that performs much of the warranty repair work.

NOTE E.    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 1,613,089 and 76,746 shares of common stock and warrants to purchase 1,013,849 and 11,667 shares of common stock for the three months ended June 30, 2003 and 2002, respectively, were not included in the computations of diluted loss per share because assumed exercise would be anti-dilutive. Unexercised options to purchase 1,613,089 and 54,302 shares of common stock and warrants to purchase 1,013,849 and 11,667 shares of common stock for the six months ended June 30, 2003 and 2002, 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 six months ended June 30, 2003 and 2002:

	Three Months Ended						Six Months Ended
In thousands, except per share data	June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Basic:
Net income (loss) applicable to all stockholders	$	(1,062	)	$	(2,048	)	($	2,391	)	$	10,083
Preferred stock dividend		—			(125	)		—			(159	)
Net income (loss) applicable to common stock	$	(1,062	)	$	(2,173	)	($	2,391	)	$	9,924
Weighted average number of common shares outstanding during the period		8,617			617			8,567			615
Add—Deferred shares		—			1			—			1
Weighted average number of shares used in calculation of basic earnings per common share		8,617			618			8,567			616
Earnings (loss) per share before preferred stock dividend	$	(0.12	)	$	(3.31	)	$	(0.28	)	$	16.36
Preferred stock dividend		—			(0.21	)		—			(0.26	)
Earnings (loss) per share applicable to common stock	$	(0.12	)	$	(3.52	)	$	(0.28	)	$	16.10
Diluted:
Net income (loss)	$	(1,062	)	$	(2,048	)	$	(2,391	)	$	10,083
Interest recognized related to convertible bridge notes		—			—			—			14
Net income (loss) applicable to all stockholders	$	(1,062	)	$	(2,048	)	$	(2,391	)	$	10,097
Preferred stock dividends		—			(125	)		—			—
Net income (loss) applicable to common stock	$	(1,062	)	$	(2,173	)	$	(2,391	)	$	10,097
Weighted average number of shares used in calculation of basic earnings per common share		8,617			618			8,567			616
Effect of dilutive stock options		—			—			—			3
Effect of dilutive preferred convertible stock		—			—			—			65
Effect of dilutive convertible bridge notes		—			—			—			57
Weighted average number of shares used in calculation of diluted earnings per common share		8,617			618			8,567			741
Earnings (loss) per share before preferred stock dividend	$	(0.12	)	$	(3.31	)	$	(0.28	)	$	13.63
Preferred stock dividend		—			(0.21	)		—			—
Earnings (loss) per share applicable to common stock	$	(0.12	)	$	(3.52	)	$	(0.28	)	$	13.63

During the six months ended June 30, 2003 and 2002, no stock options were exercised.

8

NOTE F.    SEGMENT INFORMATION

During the first six months of 2003 and 2002, 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. The information in the following tables is derived directly from the segment’s internal financial reporting used for management purposes. Unallocated costs include operating expenses, interest expense, other miscellaneous expenses, gains on restructurings 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 six months ended June 30, 2003 and 2002:

(In thousands)	2003			2002
Business Segment Net Sales
Switching	$	19,888		$	17,670
Messaging		4,878			6,584
CTI & Other		524			1,030
Net sales	$	25,290		$	25,284
(In thousands)	2003			2002
Business Segment Gross Profit
Switching	$	7,216		$	6,359
Messaging		2,104			2,614
CTI & Other		239			1
Gross profit		9,559			8,974
Operating expenses		10,325			13,467
Interest expense, net		1,639			1,174
Gain on senior debt restructuring		—			(9,000	)
Gain on other liability restructurings		—			(3,816	)
Gain on lease renegotiation		—			(2,834	)
(Gain) loss on sale of assets		(3	)		328
Miscellaneous income, net		(11	)		(428	)
(Loss) income before income taxes	$	(2,391	)	$	10,083

NOTE G.    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.

During February 2003, the Company discovered that approximately $0.6 million and $0.1 million of unauthorized disbursements were made from the pension plan during 2002 and 2003, respectively, by a former employee of Comdial. The Company believes it has adequate insurance coverage to protect the pension plan against these losses, but there can be no assurance that the plan will completely recover the losses. Management believes that this matter will not have a material adverse financial impact on the Company. No amounts have been accrued in the Company’s financial statements for any losses.

        On January 24, 2003, the Company was notified by letter from an insurance representative of the Catholic Cathedral of St. Thomas Moore that the Cathedral’s insurance carrier might pursue a subrogation claim based on a fire at the Cathedral that may have been caused by the installation or failure of equipment installed by the Company. The Company does not believe it installed any equipment at the Cathedral and has notified its insurance carrier of this claim. The Company believes that the repairs needed to repair the damage to the Cathedral were approximately $150,000, although it has received no written confirmation of same. There has been no further correspondence or other communication from any party in this matter. No amounts have been accrued in the Company’s financial statements for any losses.

9

During late 2002, the Company began discussions with a third party concerning a potential claim of patent infringement that such party has indicated it may bring against the Company. Although the Company expects to settle such claim prior to litigation, there can be no assurance that such settlement will be reached, or, even if settlement is reached, that the terms of such settlement will not have a material adverse affect on the Company. If settlement is not reached, and if litigation is filed against the Company, defense of such case will likely result in material expenditures and could have a material adverse affect on the Company. Further, there can be no assurance that the Company would prevail in such litigation, and a finding against the Company could reasonably be expected to have a material adverse affect on the Company. The Company has accrued its estimate of the probable settlement amount with respect to this matter, which is not material to the financial statements.

In suits filed against the Company and Allegheny Voice & Data, Inc. (“Allegheny”) in Kanawha County, West Virginia since November 2002, several former tenants of a commercial building, through their insurance carriers, allege that a telecommunications system sold by Comdial and installed by Allegheny caused a fire resulting in damage to the building. The total damages sought against Comdial and Allegheny by all claimants is approximately $1.1 million. After substantial investigation into this matter, the Company believes its equipment was not the cause of the fire, and has denied all of the substantive claims made against it in this matter. Motions are pending to consolidate these cases. No amounts have been accrued in the Company’s financial statements for any losses.

In November 2002, the Company filed a demand for arbitration with the American Arbitration Association against Boundless Manufacturing Services, Inc. (“Boundless”). Among other things, the Company contends that Boundless breached its contractual obligations to the Company by failing to meet the Company’s orders for the delivery of products manufactured by Boundless. The Company’s demand seeks damages in excess of $6.0 million. On February 6, 2003, Boundless responded to the Company’s demand by denying substantially all of the Company’s claims and asserting counterclaims totaling approximately $8.2 million, including approximately $0.8 million in past due invoiced amounts. The Company believes that Boundless’ claims are substantially without merit and that it has adequate substantive and procedural defenses against such claims. On March 13, 2003, Boundless announced that it has filed for protection pursuant to Ch. 11 of the U.S. Bankruptcy Code, causing a stay in the arbitration matter. It is not known at this time whether this filing will have any long-term impact on the arbitration, or whether the arbitration will eventually proceed. No amounts have been accrued in the Company’s financial statements for any losses.

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, tortuous interference with 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 case was recently pending in federal court upon the Company’s second attempt to remove it on the grounds that the plaintiff actually asserts federal ERISA claims, but was remanded to the state court by an order entered August 4, 2003. Comdial believes it has adequate substantive and procedural defenses against all claims made against Comdial in this matter and no amounts have been accrued in the Company’s financial statements for any losses.

10

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

Comdial is a Delaware corporation based in Sarasota, Florida. Comdial’s common stock is quoted on the Over the Counter Bulletin Board under the symbol “CMDZ.OB”.

Comdial(R) designs and markets sophisticated voice communications solutions for small to mid-sized offices. Comdial’s products consist of business telephone systems, unified and voice messaging, call processing, and computer telephony integration solutions. Comdial currently has an installed base of approximately 400,000 telephone systems, 4.3 million telephones and 100,000 messaging systems.

As part of our restructuring program, we have outsourced substantially all of our manufacturing requirements. Outsourced manufacturing is carried out in three principal locations: Asia, Mexico and the United States.

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

Rebates and Incentives

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

Warranty

In most cases, we provide a two-year warranty to our customers, including repair or replacement of defective equipment. We use a third party contractor to perform much of this warranty. Our outsource manufacturing partners are now responsible for the first year of the warranty repair work. We provide for the estimated cost of product warranties at the time the revenue is recognized. While we engage in various product quality programs and processes, our warranty obligation may be affected by product failure rates, the ability of our outsource manufacturers to satisfy warranty claims and the cost of warranty repairs charged by the third party contractor. The outcome of these items could differ from our estimates and revisions to the warranty estimates could be required.

Allowance for Doubtful Accounts

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

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Inventory

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

Deferred Income Taxes

We estimate our actual current tax exposures together with our temporary differences resulting from differing treatment of items for accounting and tax purposes. These temporary differences result in deferred tax assets and liabilities. We then must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, based on the guidance in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, we establish a valuation allowance. As of March 31, 2003 and December 31, 2002, all net deferred tax assets were reduced by a valuation allowance. In later years, after the Company ceases to have cumulative tax losses for three years, management will need to assess the continuing need for a full or partial valuation allowance. Significant judgment is required in this calculation and changes in this assessment could result in income tax benefits, in later periods, or the continued provision of valuation allowances until the realizability is more likely than not.

Long-lived Assets, including Goodwill and Other Intangibles

In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, and resolves implementation issues related to SFAS No. 121. We adopted SFAS No. 144 effective January 1, 2002. For long-lived assets that are held for use, the Company compares the forecasted undiscounted net cash flows to the carrying amount. If the long-lived asset is determined to be unable to recover the carrying amount, then it is written down to fair value. Differences in actual cash flows as compared to the projected cash flows could require us to record an impairment.

In July 2001, the FASB issued SFAS 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 must be tested for impairment on an annual basis, and any impairment charge resulting from the initial application of SFAS No. 142 is classified as a cumulative change in accounting principle. The Company adopted SFAS No. 142 and discontinued the amortization of goodwill effective January 1, 2002 and completed the transitional impairment test, determining that goodwill was not impaired. Impairment of goodwill is tested using a two step method. The first step is to compare the fair value of the reporting unit to its book value, including goodwill. Fair value is determined based on discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets. If the fair value of the unit is less than its book value, the Company then determines the implied fair value of goodwill by deducting the fair value of the reporting unit’s net assets from the fair value of the reporting unit. If the book value of goodwill is greater than its implied fair value, the Company writes down goodwill to its implied fair value. The Company performed its annual impairment review for 2002 and determined that no goodwill impairment charge needed to be recorded; however, there can be no assurances that subsequent reviews will not result in material impairment charges. Differences in actual cash flows as compared to the projected discounted cash flows could require us to record an impairment.

Retirement and Other Postretirement Benefit Plans

Prior to September 2000, we provided a defined pension benefit to our employees. In September 2000, we froze this plan. We accrue benefit obligations based on an annual independent actuarial valuation, but do not obtain interim valuations or otherwise adjust our accruals on an interim basis. This valuation has a number of variables, not only to estimate our benefit obligation, but also to provide us with minimum funding requirements for the retirement plan. The actuarial estimates include the expected rate of return on the retirement plan assets, the rate of compensation increases to eligible employees and the interest rate used to discount estimated future payments to retirement participants. Differences in actual experience as compared to these estimates or future changes in these estimates could require us to make changes to these benefit accruals or recognize under funding in our pension plan.

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On December 31, 2002, the projected benefit obligations of $25.6 million (calculated using a discount rate of 7.25%) exceeded the market value of the plan assets of $19.9 million by $5.7 million. As the Company has a prepaid pension asset of $2.5 million recorded as of December 31, 2002, the Company recorded a liability and related other comprehensive loss item (as a direct decrease in stockholders’ equity) on the accompanying consolidated balance sheet of $8.2 million, net of tax benefits of $0. If the Company’s investment return and other actuarial assumptions remain unchanged, no contributions are projected to be required through 2003.

Commitments and Contingencies

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

Special Note Regarding Forward-Looking Statements

Some of the statements included or incorporated by reference into our Securities and Exchange Commission filings, press releases, and shareholder communications and other information provided periodically in writing or orally by our officers, directors or agents, including this Form 10-Q, are forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are not historical facts but rather are based on certain expectations, estimates and projections about our industry, our beliefs and our assumptions. These risks could cause our actual results for 2003 and beyond to differ materially from those expressed, implied or forecasted in any forward-looking statement made by, or on behalf of, us. The risks and uncertainties include, but are not limited to, those discussed in “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” set forth on page 16.

Results of Operations

The following table sets forth for the periods indicated the percentage of revenues represented by certain items reflected in our statements of operations:

	Three Months Ended				Six Months Ended
	June 30, 2003		June 30, 2002		June 30, 2003		June 30, 2002
PERCENTAGES OF NET SALES:
Net sales	100%		100%		100%		100%
Cost of goods sold	60%		65%		62%		65%
Gross profit	40%		35%		38%		35%
Operating expenses
Selling, general & administrative	32%		42%		32%		41%
Engineering, research & Development	7%		11%		7%		12%
Impairments of long-lived assets	3%		—		2%		—
Total operating expenses	42%		53%		41%		53%
Operating loss	(2%	)	(18%	)	(3%	)	(18%	)
Other expense (income)	6%		(2%	)	6%		(58%	)
Net (loss) income	(8%	)	(16%	)	(9%	)	40%

Second Quarter 2003 vs. 2002

Comdial’s net sales for the second quarter of 2003 were $13.0 million compared to $13.0 million in the second quarter of 2002.

Gross profit for the second quarter of 2003 was $5.2 million compared to $4.5 million in the second quarter of 2002. Gross profit, as a percentage of sales, was 40% for the second quarter of 2003 compared to 35% for the same period of 2002. This increase is primarily due a change in product mix, as the Company sold more higher margin products in the second quarter of 2003 compared with the same period of 2002. In addition, during the second quarter of 2003, the Company recorded $0.2 million of license fee revenue from a third party that did not occur in the second quarter of 2002.

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Selling, general and administrative expenses (“SG&A”) decreased for the second quarter of 2003 by 23% to $4.1 million, compared with $5.4 million in the second quarter of 2002. SG&A expenses, as a percentage of sales, decreased to 32% for the second quarter of 2003 compared with 42% for the same period of 2002. This decrease primarily resulted from downsizing the work force in 2002 and more closely controlling costs.

Engineering, research and development expenses for the second quarter of 2003 decreased by 38% to $0.9 million, compared with $1.4 million for the second quarter of 2002. Engineering expenses, as a percentage of sales, decreased to 7% for the second quarter of 2003 compared with 11% for the second quarter of 2002. This decrease primarily resulted from downsizing of the work force and lower amortization of software development costs due to the write-down of impaired assets in the fourth quarter of 2002.

Prior to the Soundpipe acquisition (see Note B), Comdial had two development projects that had reached technological feasibility and software development costs were being capitalized. As a result of the Soundpipe acquisition, management reviewed all current development projects in process and, in order to maximize benefits from development funds expended, placed emphasis on the Soundpipe technology acquired. Therefore, management decided to discontinue these two historical Comdial development projects. The software that had been developed is not expected to be used in any future product development and will not generate any future cash flows. As a result, the amounts that had been capitalized related to those two projects of $365,000 were written off in June 2003 and are recorded as impairments of long-lived assets in the consolidated income statement.

Interest expense increased for the second quarter of 2003 by 11% to $0.8 million, compared with $0.7 million in the second quarter of 2002. This was primarily due to the amortization of the deferred financing costs on the private placement notes.

During the second quarter of 2002, the Company expended significant efforts to restructure its various liabilities resulting in gains of $0.9 million.

The net loss for the second quarter of 2003 was $1.1 million compared with $2.0 million for the second quarter of 2002, primarily due to the gross margin improvements and the reductions in SG&A expenses in 2003. There were no preferred shares outstanding in 2003.

First Six months of 2003 vs 2002

Comdial’s net sales for the first six months of 2003 were $25.3 million compared to $25.3 million in the first six months of 2002.

Gross profit for the first six months of 2003 was $10.0 million compared to $9.0 million in the first six months of 2002. Gross profit, as a percentage of sales, was 38% for the first six months of 2003 compared to 35% for the same period of 2002. During the first quarter of 2003, the Company recorded a decrease in its warranty liability, which increased gross margin by $0.3 million. The reduction to the warranty liability was due to several factors, including a reduction in product repair return rates and a reduction in the price charged by the third party contractor that performs much of the warranty repair work. During the first quarter of 2003, the Company recorded a provision for product obsolescence, which decreased gross margin by $0.4 million. The provision primarily related to raw materials that were written down to estimated net realizable value due to a reduction in demand for a legacy product line that management, in the first quarter of 2003, decided should be discontinued. During the second quarter of 2003, the Company’s margins improved primarily due a change in product mix, as the Company sold more higher margin products in the second quarter of 2003 compared with the same period of 2002. In addition, during the second quarter of 2003, the Company recorded $0.2 million of license fee revenue from a third party that did not occur in the second quarter of 2002.

Selling, general and administrative expenses (“SG&A”) decreased for the first six months of 2003 by 22% to $8.1 million, compared with $10.4 million in the first six months of 2002. SG&A expenses, as a percentage of sales, decreased to 32% for the first six months of 2003 compared with 41% for the same period of 2002. This decrease primarily resulted from downsizing the work force in 2002 and more closely controlling costs.

Engineering, research and development expenses for the first six months of 2003 decreased by 40% to $1.8 million, compared with $3.0 million for the first six months of 2002. Engineering expenses, as a percentage of sales, decreased to 7% for the first six months of 2003 compared with 12% for the first six months of 2002. This decrease primarily resulted from downsizing of the work force and lower amortization of software development costs due to the write-down of impaired assets in the fourth quarter of 2002.

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Prior to the Soundpipe acquisition (see Note B), Comdial had two development projects that had reached technological feasibility and software development costs were being capitalized. As a result of the Soundpipe acquisition, management reviewed all current development projects in process and, in order to maximize benefits from development funds expended, placed emphasis on the Soundpipe technology acquired. Therefore, management decided to discontinue these two historical Comdial development projects. The software that had been developed is not expected to be used in any future product development and will not generate any future cash flows. As a result, the amounts that had been capitalized related to those two projects of $365,000 were written off in June 2003 and are recorded as impairments of long-lived assets in the consolidated income statement.

Interest expense increased for the first six months of 2003 by 40% to $1.6 million, compared with $1.2 million in the first six months of 2002. This was primarily due to the amortization of the deferred financing costs on the private placement notes.

During the first six months of 2002, the Company expended significant efforts to restructure its various liabilities resulting in gains of $15.6 million, which included the gain on senior debt restructuring of $9.0 million, the gain on other liability restructurings of $3.8 million, and the gain on lease renegotiation of $2.8 million.

The net loss for the first six months of 2003 was $2.4 million compared with net income of $10.1 million for the first six months of 2002, primarily due to the gains on debt and other liability restructurings recorded during the first six months of 2002 discussed above. There were no preferred shares outstanding in 2003.

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:

	June 30, 2003		December 31, 2002
	(In Thousands)
Cash and cash equivalents	$	1,425	$	3,166
Current maturities of debt		515		644
Working capital		5,991		5,864

In late 2002, majority control of the Company’s stock ownership changed. Since then, changes have been made in the management team and in operations in efforts to increase sales, improve gross margins and further control other expenses so that the Company can achieve profitability. In addition, in March 2003, management obtained a letter of intent for a $5 million asset-backed financing, which it intends to pursue further, although there are no assurances that this financing will be executed. The accompanying financial statements have been prepared on the going concern basis. Management believes that its cash flow from operations, combined with cash and working capital on hand, will be sufficient to allow the Company to meet its operating expenses, debt service and capital expenditure requirements for at least the next year. However, if sales levels and/or gross margins decline, other operating expenses increase, or other matters arise, management could be required to undertake an alternative plan to potentially include further restructuring or changes in the business, or seek additional debt or equity financing.

In connection with the debt restructuring in late 2002, 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. As of December 31, 2002, the $1.5 million remained on deposit with BofA as collateral for the two letters of credit and was recorded in prepaid expenses and other current assets in the accompanying consolidated balance sheet. In March 2003, the letters of credit expired and BofA paid, under the terms of the letter of direction discussed above, $1.5 million to the Company. In April 2003, the Company obtained two new letters of credit totaling $1.0 million and was required to secure these letters of credit with $1.0 million of cash, which the Company recorded as restricted cash in the accompanying consolidated balance sheet as of June 30, 2003.

As of June 30, 2003, the Company’s cash and cash equivalents were lower than December 31, 2002 by $1.7 million and working capital increased by $0.1 million due primarily to the timing of vendor payments.

OTHER FINANCIAL INFORMATION

During the three and six months ended June 30, 2003 and 2002, primarily all of Comdial’s sales, net income, and identifiable net assets were attributable to the telecommunications industry.

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

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

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

• any adverse impact of competitors’ products;

• delays in development of highly complex products;

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

• adverse market fluctuations caused by general economic conditions;

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

• any lack of success of our restructuring plans;

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

• unfavorable outcomes in any pending or threatened litigation;

• any inability to form or maintain key strategic alliances;

• our inability to raise capital when needed;

• any continued reductions in our liquidity and working capital;

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

• unanticipated liabilities or expenses;

• the availability and pricing of parts and components;

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

These risks could cause our actual results for 2003 and beyond to differ materially from those expressed, implied or forecasted in any forward-looking statement made by, or on behalf of, us. We undertake no obligation to publicly update or revise the forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

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OUTSOURCING RISKS

As part of our restructuring program, we have outsourced substantially all of our manufacturing requirements. Outsourced manufacturing is carried out in three principal locations: Asia, Mexico and the United States. Outsourcing, particularly with international manufacturers, carries certain risks, which include, but may not be limited to:

• the outsourcing contractors’ ability to manufacture products that meet our technical specification and that have minimal defects;

• the outsourcing contractors’ ability to honor their product warranties;

• the financial solvency, labor concerns and general business condition of our outsourcing contractors;

• unexpected changes in regulatory requirements;

• inadequate protection of intellectual property in foreign countries; and

• political and economic conditions in overseas locations;

• risks of fire, flood or acts of God affecting manufacturing facilities; and

• our ability to meet our financial obligations to our outsourcing contractors.

In addition, our outsourcing contractors acquire component parts from various suppliers. Similar risks are involved in such procurement efforts. Due to our 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 our outsourcing contractors would have a material adverse affect on our business in the short term and may have a material adverse affect in the long term.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Comdial believes that it does not have any material exposure to market risk associated with interest rate risk, foreign currency exchange rate risk, commodity price risk, equity price risk, or other market risks.

ITEM 4. CONTROLS AND PROCEDURES

Quarterly Evaluation of the Company’s Disclosure Controls and Internal Controls.    As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company evaluated the effectiveness of the design and operation of its “disclosure controls and procedures” (“Disclosure Controls”), and its “internal controls and procedures for financial reporting” (“Internal Controls”). This evaluation (the “Controls Evaluation”) was done under the supervision and with the participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”). Rules adopted by the Securities and Exchange Commission (“SEC”) require that in this section of the Quarterly Report we present the conclusions of the CEO and the CFO about the effectiveness of our Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation.

Disclosure Controls and Internal Controls.    As provided in Rule 13a-14 of the General Rules and Regulations under the Securities and Exchange Act of 1934, as amended, Disclosure Controls are defined as meaning controls and procedures that are designed with the objective of insuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, designed and reported within the time periods specified by the SEC’s rules and forms. Disclosure Controls include, within the definition under the Exchange Act, and without limitation, controls and procedures to insure that information required to be disclosed by us in our reports is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

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Scope of the Controls Evaluation.    The evaluation made by our CEO and CFO of our Disclosure Controls and our Internal Controls included a review of the controls’ objectives and design, the controls’ implementation by the Company and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the Controls Evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in the Company’s Internal Controls, or whether the Company had identified any acts of fraud involving personnel who have a significant role in the Company’s Internal Controls. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions”; these are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accord with our on-going procedures.

In accord with SEC requirements, our CEO and CFO each have confirmed that, during the most recent fiscal quarter and since the date of the Controls Evaluation to the date of this Quarterly Report, there have been no significant changes in Internal Controls or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Conclusions.    Based upon the Controls Evaluation, our CEO and CFO have each concluded that, our Disclosure Controls are effective to ensure that material information relating to Comdial and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.

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PART II—OTHER INFORMATION

ITEM 1.    Legal Proceedings

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

ITEM 2:    Recent Sales of Unregistered Securities

On June 6, 2003, Comdial Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Comdial Corporation (“Comdial”), completed the acquisition of substantially all of the assets of Soundpipe Inc. (“Soundpipe”), a privately held Delaware corporation with its sole office in Santa Clara, California. Soundpipe was primarily engaged in the design and development of telecommunications equipment utilizing voice over Internet Protocol (VoIP) technology. The assets acquired include all of Soundpipe’s intellectual property, including, but not limited to equipment prototypes, software source code and several patent applications and trade secrets, and certain physical assets including computer equipment and office furnishings.

The acquisition involved the issuance of a total of 250,000 unregistered shares of the common stock of Comdial, par value $0.01 (the “Stock”). The Stock was issued as follows: 20,000 shares to Soundpipe; 180,000 shares to Altos Ventures, LLC (“Altos”), the principal shareholder of Soundpipe, as directed by Soundpipe on its behalf and in consideration of the cancellation of certain indebtedness held by Altos; and 50,000 shares to East Peak Advisors LLC.

The issuance described above is intended to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), by virtue of the provisions of section 4(2) of the Securities Act.

ITEM 4:    Submission of Matters to a Vote of Security Holders

On May 8, 2003, Comdial held its annual meeting at its corporate headquarters in Sarasota, Florida. The following matters were voted upon:

(1) The following directors were elected to serve one-year terms: Nickolas A. Branica, Edwin M. Cooperman, Michael S. Falk, Alan Kessman, Travis Lee Provow, Keith M. Rosenbloom and S. Sanford Schlitt. Shares of common stock were voted as follows:

Nickolas A. Branica:	For – 7,639,443	Withheld – 8,894
Edwin M. Cooperman:	For – 7,640,821	Withheld – 7,516
Michael S. Falk:	For – 7,640,883	Withheld – 7,454
Alan Kessman:	For – 7,640,883	Withheld – 7,454
Travis Lee Provow:	For – 7,626,645	Withheld – 21,692
Keith M. Rosenbloom:	For – 7,640,879	Withheld – 7,458
S. Sanford Schlitt:	For – 7,640,823	Withheld – 7,514

(2)  An amendment to the 2002 Employee and Non-Employee Director Stock Incentive Plan to increase the number of shares of common stock available for issuance under said plan to 1,500,000 from 1,000,000 was proposed. The amendment was approved by stockholders. Shares of common stock were voted as follows: For – 7,258,922, Against – 40,299, Abstain – 1,636.

(3)  Ratification of the Company’s selection of Ernst & Young LLP as its independent certified public accountants was proposed. Such ratification was approved by stockholders. Shares of common stock were voted as follows: For – 7,643,315, Against – 3,828, Abstain – 1,192.

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

(a) Exhibits included herein:

(31)  Section 302 Certifications:

31.1 Certification of Nickolas A. Branica, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.

31.2 Certification of Kenneth M. Clinebell, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32)  Section 906 Certifications:

32.1 Certification of Nickolas A. Branica, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Kenneth M. Clinebell, Senior Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

On June 10, 2003, the Company filed a report on Form 8-K disclosing the acquisition of substantially all of the assets of Soundpipe Inc.

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 (Principal Executive Officer)

By:	/S/    KENNETH M. CLINEBELL
	Kenneth M. Clinebell Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Date: August 13, 2003

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