10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

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

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

COMMON STOCK (PAR VALUE $0.01 EACH)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004, was approximately $6,852,047. The number of shares of common stock outstanding as of April 14, 2005, was 9,819,143.

TABLE OF CONTENTS

Part I
Item 1.	Business	3
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to a Vote of Security Holders	11
Part II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	12
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 8.	Financial Statements and Supplementary Data	24
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	51
Item 9A.	Controls and Procedures	51
Part III
Item 10.	Directors and Executive Officers of the Registrant	52
Item 11.	Executive Compensation	53
Item 12.	Security Ownership of Certain Beneficial Owners and Management	60
Item 13.	Certain Relationships and Related Transactions	61
Item 14.	Principal Accounting Fees and Services	62
Part IV
Item 15.	Exhibits and Financial Statement Schedules	62

2

PART I

ITEM 1. BUSINESS

GENERAL

Comdial Corporation (“Comdial” or the “Company”), incorporated in 1982, is a converged voice and data enterprise communications systems provider. We offer a comprehensive product line designed exclusively for small to midsize enterprises. Our products include enterprise/business communications systems, endpoints, and applications that enable customers to seamlessly migrate from traditional telephony to the latest Voice-over-Internet Protocol (“VoIP”) technology. This seamless migration is a hallmark of our value proposition and facilitates long-term customer loyalty from both our end user customers and solutions providers. Our common stock is quoted on the Over the Counter Bulletin Board under the symbol “CMDZ.OB”.

We satisfy a broad set of enterprise communications requirements through a complete portfolio of VoIP, converged, and traditional telephony solutions. Our latest products, the CONVERSip^™ media platforms, incorporate telephony, computer and Internet technologies into fully integrated communications solutions. With CONVERSip, we became one of the first companies to commercialize and deliver an enterprise communications solution for small to midsize offices incorporating Session Initiation Protocol (“SIP”). SIP is an Internet-based open standard that enables a multitude of devices to establish and control voice, video and text communication sessions. SIP facilitates the development of advanced applications, multiple client device options, and interoperability with existing Internet-based solutions, replacing traditional communications obstacles with simplified ownership, administration, and easily accessed functionality.

Over 800 authorized solutions providers throughout North America sell, service, and support our products. We distribute our products to our solutions providers through a select group of distributors and directly from our Sarasota, Florida fulfillment center.

Products

We are a niche player in the enterprise communications market, targeting small to midsize businesses, branch or regional offices of large organizations, national retailers, government agencies, and education campuses. Our solutions cost-effectively scale from 4 to over 400 seats in a single location and can network up to 14 locations. Our scalability and distributed environment support facilitates organizational needs regardless of geographic boundaries. Teleworker or mobile worker support enables employees to stay connected to their enterprise regardless of their location.

Over the years, we have shipped over 400,000 telephone systems. However, as technology shifts, we have focused on developing next generation communications solutions, which focus on data convergence or connecting telephony with computer and Internet technologies. Our systems provide a migration path from traditional telephony to advanced IP telephony making our installed base of traditional telephone systems ripe for VoIP adoption.

Due to the voice and data convergence phenomenon, VoIP networks and the Internet are becoming increasingly important. As part of this technology shift, IP telephony is an important element within our new and existing product portfolio. Our traditional, key hybrid products are able to migrate to our new CONVERSip^™ brand of VoIP solutions to provide customers with a scalable solution that enables them to maintain existing infrastructure. This provides the customer with cost savings and the ability to migrate into emerging technology at a pace unique to their business requirements.

Communications Platforms

Our communications platforms consist of the CONVERSip MP1000 and MP5000 Media Platforms, the FX II Communications System, and the DX-80 Small Business Communications System.

CONVERSip MP1000 Media Platform

The CONVERSip MP1000 Media Platform, an all-in-one platform, provides a fully integrated solution for small offices or branch offices with 4 - 40 employees. Its design incorporates Local Area Network (“LAN”) telephony, an 8-port gateway, auto attendant, unified messaging, unified call distribution, browser-based administration and software upgradeability, into a single platform. All voice, data and multimedia traffic runs over standard Ethernet cabling, allowing businesses to leverage a single IP infrastructure and reduce network management and maintenance expenses.

The MP1000 eliminates bulky components and complicated installation procedures typically associated with other phone systems. With office space at a premium, the 1U form factor (2.5” high) enables the MP1000 to be installed in small spaces. There are no additional components to assemble or install. The installation process consists of plugging in the telephone lines, the LAN connection, and power. Once the endpoints are connected to the LAN and set to the address of the MP1000, they automatically register and receive an extension number. After setting call routing and voice mail options, an MP1000 system can usually be operational in less than an hour.

Once the MP1000 is operational, it begins saving its owner time and money with its innovative browser-based administration interface. Customers find that administering the MP1000 is easily done in-house eliminating the delays and costs associated with calling the telephone company. Local or remote system administrators can easily change their speed dials, auto-attendant greetings and call routing instructions in just a few minutes through their Internet browser.

3

CONVERSip MP5000 Media Platform

The CONVERSip MP5000 Media Platform is our mid-market enterprise solution. It features a flexible architecture that can support analog, digital, conventional IP, SIP, and converged configurations. The MP5000 provides application support for call centers, real-time collaborative communications, unified messaging, telecommuting, video calling, hot-desking, meet-me conferencing, IP networking and presence management.

The MP5000 is a versatile solution that supports any combination of endpoints allowing existing customers to leverage their legacy endpoints in concert with SIP endpoints on the same MP5000 system. In addition, the MP5000 facilitates IP telephony through the implementation of a full-featured IP communications solution for single or multi-site enterprises by leveraging existing LAN or Wide Area Network (“WAN”) infrastructure. With the MP5000, customers can swiftly implement telephony services across multiple locations to reduce capital expenditures and operating costs. The telecommuting option provides teleworkers or mobile workers full communications functionality in remote offices/locations along with the added security offered by virtual private networks.

The MP5000 supports our CONVERSip EP200 Multimedia Endpoint, EP300 SIP Endpoint, EP100 Digital and IP Endpoints as well as our traditional Impact SCS and Scout II Wireless Endpoints. The EP200 SIP endpoint provides presence management of other SIP endpoints as well as digital and analog endpoints, park orbits and meet-me conference bridges. Presence management allows users to visually see the availability of other users before attempting voice, video or text messaging sessions.

The MP5000 supports our call center applications as a complete solution for local or distributed call centers including call center management, automatic call distribution, call recording, reporting and unified messaging. Through call center statistics, customers can easily determine staffing requirements, identify peak calling times, review historical trends and obtain immediate snapshots of real-time activity.

With the unified messaging option, all messaging is streamlined into a single solution to increase productivity. Employees can securely access all their voice and email messages from any telephone or personal computer on the network. When accessing messages by phone, sophisticated text-to-speech software lets users hear email messages without the need for a personal computer.

The MP5000 supports real-time collaboration with its corporate instant messaging, video calling and advanced presence management capabilities. These tools can increase productivity and allow management to make decisions more efficiently.

The hot-desking feature allows users to become instantly productive by logging into the MP5000 from anywhere across an enterprise’s distributed network. Whether a user logs into a personal computer or phone in a remote office-or whether shift workers log into shared offices-they instantly gain secure access to important capabilities inherent within the system.

FX II Business Communication System

The FX II is a feature rich platform for midsize enterprises looking to start out with a traditional business communications system that supports VoIP migration. The FX II includes standard capabilities, such as paging, conferencing and DID support, but also includes a built-in, multi-port conference bridge. The FX II leverages the foundations of traditional, digital telephony solutions, while taking advantage of the latest in converged network technology. With a wide variety of connectivity options, including analog and digital PSTN, T1, and PRI, the FX II meets the evolving needs of growing enterprises.

The FX II can be deployed as a standalone system networked to other FX II systems via a secure LAN/WAN network. Small and midsize enterprises can cost-effectively extend their communications network to branch offices, teleworkers and road warriors. Seamlessly, users gain access to the functionalities previously reserved for their office, without having to purchase and maintain external systems.

The FX II offers a wide range of quality, powerful and easy-to-use endpoints to meet any need. It supports our CONVERSip EP100 Digital and IP Endpoints, Impact SCS Endpoints, and Scout Wireless Endpoints.

Customers can choose from several applications when deploying the FX II. These applications include Interchange Communications Suite, Corporate Office, Impact Attendant, Corporate Call, Impact Group, and Quick Q automated call distribution (“ACD”).

DX-80 Business Communication System

The DX-80 Business Communications System provides a complete telecommunications solution for small enterprises. In addition to offering a comprehensive feature set previously available only on high-end Private Branch Exchanges (“PBXs”), the DX-80 also supports an integrated voice mail option based on our industry recognized Corporate Office Voice Messaging software. This combination provides small enterprises with a “large company” communications solution at a very affordable price. The DX-80’s expandable architecture grows with the small business, allowing room for future expansion.

4

Endpoints

We offer a variety of endpoints designed for all business needs. Our new CONVERSip SIP endpoints such as the EP200 Multimedia Endpoint and EP300 SIP Endpoint are supported on CONVERSip platforms, while our traditional endpoints such as the EP100 Digital and IP Endpoints, Impact SCS, and Scout II Wireless Endpoints operate on either the FX II or MP5000.

The new CONVERSip EP200 Multimedia Endpoint transforms any Microsoft® Windows® XP personal computer to a fully functional business communication system with the added advantage of multimedia collaboration. Users conduct voice, video and corporate instant messaging sessions with other EP200 users, or they can make/receive calls to and from regular telephones. The EP200 uses SIP to provide office desktop communications to mobile or remote workers. Through the convenience of familiar Windows^® point and click menus, users can easily dial contacts, initiate conference calls, park callers and pick up parked calls. Presence management allows users to know if and how other subscribers can be reached. Like the EP300, the EP200 works on the CONVERSip media platform and is interoperable with IP, digital and analog telephones.

The new CONVERSip EP300 SIP Endpoint is a desktop phone, delivering high quality voice communications using SIP. The EP300 is attached locally to the LAN or at remote sites securely through the enterprise’s virtual private network. The EP300 supports presence management and is available in 12 or 24 programmable button models.

The EP100 Digital Endpoint offers a wide selection of user-friendly features, including a large-screen interactive display, programmable soft keys, message waiting indicators, one-touch dialing, full-duplex speakerphone, and the convenience of hands-free operation in a contemporary design.

The EP100 IP Endpoint lets users connect to their FX II or MP5000 from remote locations. No additional equipment or costly extenders are needed to enjoy the full-functionality of this feature-rich IP phone.

The Impact SCS Telephones offer the same features as the EP100 Digital Endpoints, but in a traditional design.

The Scout II Wireless Business Telephones add office mobility to FX II or MP5000 platforms – ensuring no call goes unanswered even while users are away from their desk.

Applications

From messaging to computer-telephone integration (CTI) and call center applications, we offer a broad variety of communications applications.

Interchange Communications Suite – Unified Messaging and Workgroup Call Center

With Interchange Communications Suite, our customers can consolidate all their voice processing needs into a single, easy-to-use platform. Interchange Communications Suite was engineered to provide unified messaging, mobility and call handling in one, tightly integrated solution. Interchange’s modular design lets users choose the options that meet their unique communications requirements. The Unified Messaging option enables users to click their mouse to listen to, save or forward voicemails, and even listen to emails over the phone from remote locations. The Call Center option meets the needs of informal workgroup call centers requiring basic routing, reporting and administration. The Interactive Voice Response option captures and provides real-time information to callers by automating everyday phone inquiries.

Corporate Office - Voice Messaging Systems

We offer a number of voice messaging systems for businesses of all sizes. These products are scaleable and serve the needs of businesses from very small (2-ports) to midsize (64-ports). The products provide standard voice processing features such as auto attendant, voice store and forward, multiple greetings and individual voice mailboxes. Available features include fax tone detection, IVR (interactive voice response to user touch-tone commands), and visual call management (desktop tools to manage call traffic and customize an individual’s messaging environment).

CONVERSip Contact Center

The CONVERSip Contact Center is designed for call centers that need advanced communication features typically found on larger call center systems. The CONVERSip Contact Center, available with MP5000 systems, delivers skills-based routing, unified voice messaging, call recording and Computer Telephony Integration in a fully integrated, modular design that can be customized to meet the needs of busy call centers. Advanced features include: integration with customer relationship management systems for screen pops, automated call back of callers in the queue, call recording for improved quality control, skills-based routing and real-time monitoring of agent productivity.

QuickQ - Automatic Call Distribution

QuickQ is Comdial’s traditional ACD offering. Quick Q is a server based application intended to control call

5

flow in the FX II and record call history for the purpose of producing ACD supervisor and management reports and real-time displays (on telephone LCDs and reader-boards) of call traffic. QuickQ helps to improve customer service by ensuring callers get connected to the best resource to serve their needs. Automated announcements welcome callers, while advance call routing and queuing techniques search the call center for the best available resource. Real-time monitoring and reporting tools help supervisors ensure that their call center is operating at peak performance.

Impact Attendant, Impact Group and Corporate Call - CTI Applications

Computer telephony integration (“CTI”) applications enable users with the click of a mouse to direct incoming calls, monitor availability, initiate conference calls, and speed dial. We offer a variety of CTI applications for specific business needs. Impact Attendant is designed for reception and operator console applications; Corporate Call adds call handling and messaging control to Microsoft® Outlook®; and Impact Group provides call control and status to workgroups across your business.

Strategy

Our strategy centers on providing our target customers with cost effective communication products. We have made significant engineering investments to deliver compelling products into the market such as our CONVERSip-branded products. In addition, we have developed a distribution model that will allow us to reach traditional telephony and data networking resellers.

New Product Development

We are integrating technological advancements rapidly into our product strategy so we can continue to be a leader within our market segment. Our customers are tasked with enhancing their current technology infrastructure to both increase efficiency and profitability. We offer products and solutions that are integral to the success of our customers.

New product development is integral to our positioning within the communications market. As a result, we continuously develop and enhance our product portfolio through the introduction of new products and enhancements to our existing product lines. In 2004, we launched our CONVERSip MP1000 and MP5000 Media Platforms, as well as our CONVERSip EP200 Multimedia and EP300 SIP-based Endpoints. The CONVERSip EP200 is a feature-rich soft phone, offering traditional telephony features such as voice calling, park and retrieve, do not disturb, redial, conferencing, and paging, as well as advanced functionality such as video calling, presence management and corporate single and multi-party instant messaging. All of this functionality is displayed on an enhanced GUI interface.

In addition to offering a complete, targeted, and competitive product portfolio, we seek continued growth in the communications industry by expanding our solutions provider network to further penetrate the small to midsize enterprise market.

One of our core competencies is the development of a comprehensive sales and distribution channel, comprised of a network of solutions providers across North America. We maintain solutions providers in every major metropolitan area and as of December 31, 2004, we had over 800 registered solutions providers. We provide our solution providers with sales, marketing, technical and customer support. In addition, we offer a sales incentive program to our solution providers, which is designed to motivate and reward outstanding sales and service.

Strategic Alliances

We plan to continue to evaluate strategic alliances where we can either generate more customers or enhance our product lines.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

During 2004, 2003 and 2002, substantially all of our sales, net income, and identifiable net assets were attributable to the telecommunications industry with over 99% of sales occurring in the United States.

We organize our domestic 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) CTI applications and other.

6

Product Sales Information

The following table presents certain relevant information concerning our business segments for the periods indicated:

	Year Ended December 31,
In thousands	2004		2003		2002
Business segment net sales:
Switching	$	31,449	$	37,464	$	36,892
Messaging		6,981		9,362		13,240
CTI & Other		1,153		1,115		1,589
Net sales	$	39,583	$	47,941	$	51,721

The significant decrease in messaging revenue in 2004 and 2003 is primarily due to the product mix. During 2004 and 2003, there was reduced demand for our Corporate Office products, as users were focusing more on voice messaging products that are integrated with the voice switching systems. In addition, as the market for voice processing systems has matured, the competitive marketplace has caused pricing pressures.

NARRATIVE DESCRIPTION OF BUSINESS

Products

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

Sales and Marketing

Through a comprehensive sales and marketing effort, we build on our existing customer base of approximately 400,000 shipped business communications systems and 4 million telephones.

In order to enhance market penetration opportunities, we evaluated different distribution strategies to improve our ability to successfully operate in a very competitive market and to continue to offer a flexible and feature rich product portfolio. The newly announced Authorized Direct Dealer Program (the “Program”) was developed to build closer working relationships with certain of our pre-qualified dealer organizations, better understand end customer requirements and optimize supply chain logistics by gaining real time knowledge of field sales activities. This tiered program offers enhanced benefits to its participants, including competitive pricing, geographic territory management, focused marketing support and reduced training costs, among other benefits. We established stringent qualification guidelines based on specific market criteria such as annual purchases, technical qualifications, number of employees, number of dedicated sales people, number of years in the business, financial condition, local reputation and professionalism of the facility.

Although we established the Program to enhance our sales opportunities, we still rely on our distribution partners to market and sell our products to dealers that are not associated with the Program. During 2004, three distributors collectively accounted for more than 78% of our net sales. These are ALLTEL Supply, Inc. (“ALLTEL”), Graybar Electric Company, Inc. (“Graybar”), and Sprint North Supply, Inc. (“North Supply”). In 2004, net sales to ALLTEL, Graybar, and North Supply amounted to approximately $7.0 million (18%), $14.7 million (37%) and $9.2 million (23%), respectively. In 2003, net sales to ALLTEL, Graybar, and North Supply amounted to approximately $8.6 million (18%), $20.9 million (44%) and $11.6 million (24%), respectively.

Other indirect channels include OEM relationships, international sales, and dealer direct sales for specific products. International sales for 2004, 2003 and 2002 were less than 1% of our total net sales.

Engineering, Research and Development

Our product development activities are designed to enhance existing products and services and originating new products. We own certain patents on products and designs in the United States and Canada that protect certain of our product development activities. We ensure that research and development resources are spent on projects that provide the highest return and strategic value.

Research and development costs for the fiscal years ended 2004, 2003 and 2002 comprise the majority of engineering, research, and development costs, which were $3.6 million, $3.5 million and $5.3 million, respectively.

Some of the costs associated with the development of product software have been capitalized. The accounting for such software follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 86. The amounts capitalized in 2004, 2003 and 2002 were $2.2 million, $2.1 million and $0.7 million, respectively. The amortization expense of capitalized software development costs in 2004, 2003 and 2002 were $2.2 million, $2.4 million and $3.1 million, respectively.

7

Manufacturing and Quality Control

We have streamlined our product offerings in 2004, 2003 and 2002 by eliminating products that were redundant and/or low volume, thereby simplifying outsourcing and reducing the associated manufacturing risk. This action also has the added benefit of concentrating more volume on the remaining products, which has had a positive effect on cost, efficiency and quality. We believe that outsourcing the manufacturing of our products provides benefits in the form of lower costs, higher margins and competitively priced products.

Competition

We experience significant competition from larger companies with key competitive factors being price, quality, brand name and availability. However, we target a niche market with a specified line of quality, feature-rich, price competitive products that are easily deployed and maintained.

The number and size of competitors vary considerably depending on the product line. We expect that competition will continue to be intense in the markets we serve, and there can be no assurance that we will be able to continue to compete successfully in the market place or that we will be able to maintain our current dealer network.

Backlog

In 2002, we experienced difficulties in fulfilling certain product orders as a result of the production transition from our own manufacturing in Virginia to the outsourcing partners, plus a backlog that had been built up with one of the United States outsourcing partners. These problems have been addressed by changing outsourcing partners. Also in 2002, one principal outsource manufacturer was unable to meet substantially all of our product delivery orders because of financial and operational problems. That inability caused further problems for us in meeting customer orders and resulted in a substantial backlog, potential lost business and other losses. As a result, we were forced to terminate our relationship with that manufacturer and transition that work to other contractors. We filed an arbitration action against that manufacturer in 2002 in order to seek recovery of the losses caused by their failure in performance; this action is still pending. While we believe these problems with these contract manufacturers have been addressed, we cannot give assurances that they will not continue to have an impact on sales and revenues, or that similar or other significant problems will not occur in the future. As of December 31, 2004 and 2003, the backlog was approximately $0.6 million and $1.0 million, respectively.

Intellectual Property

From time to time, we have been subject to proceedings or claims alleging infringement of intellectual property rights of third parties. Such matters have required us to expend significant sums in litigation and/or in licensing fees. Moreover, such claims could result in significant damages being awarded, and/or the requirement to develop non-infringing technology, or acquire additional licenses to the technology that is the subject of the asserted infringement, any of which could have a material adverse effect on our business. Moreover, we rely upon copyright, trademark, patents and trade secret protection to protect our proprietary rights in our products and processes. There can be no assurance that these protections will be adequate to deter misappropriation of our technologies or independent third-party development of potentially infringing technologies.

The business telecommunications industry is characterized by rapid technological change. Industry participants often find it necessary to develop products and features similar to those introduced by others, with incomplete knowledge of whether patent protection may have been applied for or may ultimately be obtained by competitors or others. The telecommunications manufacturing industry has historically witnessed numerous allegations of patent infringement and considerable related litigation among industry participants. As noted above, we have received claims of patent infringement from several parties seeking substantial sums and have been sued in federal court for patent infringement. In response to prior infringement claims, we have pursued settlements and/or have obtained nonexclusive licenses entitling us to utilize the patented technologies or processes that are widely licensed and used in the telecommunications manufacturing industry. These licenses will either expire at the end of the patent license or the end of an agreed-to period. Currently, we are negotiating with certain parties concerning the licensing of patented technologies.

Employees

As of December 31, 2004, we have 135 full-time employees; 32 in product development (including engineering, product management and technical publications), 67 in sales and marketing (including customer service and support), 18 in operations (including procurement, quality assurance, warehouse and distribution), and 18 in finance, information technology and administration. None of our employees are covered by collective bargaining agreements and, overall, we believe relationships with our employees are good.

Website Access to Reports

We make available free of charge through our internet site, via a link to the EDGAR database of the Securities and Exchange Commission (“SEC”), our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, you may read and copy any

8

reports, statements, or other information that we file at the SEC’s Public Reference Room at 450 Fifth Street NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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 and contraction caused by general economic conditions;

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

• 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 reductions in our liquidity and working capital;

• any negative impact resulting from downsizing of our workforce;

• unanticipated liabilities or expenses;

• availability and pricing of parts and components;

• any loss of key employees, including executives and key product development engineers; and

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

These risks could cause our actual results for 2005 and beyond to differ materially from those expressed, implied or forecasted in any forward-looking statement made by, or on behalf of, us. We undertake no obligation to publicly update or revise the forward-looking statements made in this Form 10-K to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.

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;

9

• 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;

• 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. In 2002, we experienced significant problems associated with a principal outsource manufacturer. Faulty component parts used by the manufacturer in the production of a principal product caused a significant shortfall in product inventory, and led to our inability to meet product orders, negatively impacting sales and revenues. In addition, we were adversely affected by the port strike in early 2003 that resulted in the temporary closure of certain ports on the West Coast of the United States. While these problems have been addressed, we cannot give assurances that they will not continue to have an impact on sales and revenues, or that similar or other significant problems will not occur in the future.

ITEM 2. PROPERTIES

We lease approximately 80,000 square feet of office and warehouse space in Sarasota, Florida, which serves as our corporate headquarters. This lease expires in January 2010.

We lease 26,000 square feet of light industrial space in Charlottesville, Virginia for use by our engineering and technical services functions. The lease is on a month-to-month basis.

ITEM 3. LEGAL PROCEEDINGS

We currently, and from time to time, are involved in litigation arising in the ordinary course of business. We believe that it is at least reasonably-possible that certain claims, described below, may have a material adverse outcome. While we intend to apply vigorous defenses, we can give no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our results of operations, cash flows or financial condition.

During late 2002, we began discussions with a third party concerning a currently unasserted claim of patent infringement. Although we expect to settle this 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. If settlement is not reached, and if litigation is commenced against us, defense of such case will likely result in significant legal expenditures. Further, there can be no assurance that we would prevail in such litigation, and a finding against us could reasonably be expected to have a material adverse affect. We have accrued an estimate of the probable settlement amount with respect to this matter, which amount is not material to the financial statements.

In November 2002, we filed a demand for arbitration with the American Arbitration Association against Boundless Manufacturing Services, Inc. (“Boundless”). Among other things, we contend that Boundless breached its contractual obligations by failing to meet our orders for the delivery of products manufactured by Boundless. We are seeking damages in excess of $6.0 million. On February 6, 2003, Boundless responded to our demand by denying substantially all of the claims and asserting counterclaims totaling approximately $8.2 million, including approximately $0.8 million in past due invoiced amounts. We believe that Boundless’ claims are without merit and that we have adequate substantive and procedural defenses against such claims. On March 13, 2003, Boundless announced that it filed for protection pursuant to Chapter 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 our financial statements for any gain or loss contingencies associated with this case.

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 and defamation, and is seeking compensatory, punitive and exemplary damages in the aggregate 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 our executive

10

retirement plan. In pre-trial proceedings, the court dismissed all claims except for his interference claim. On March 18, 2004, following a jury trial on that claim, the court granted our motion to dismiss the case without jury deliberations. In late March 2004, Mr. Grover filed a motion for reconsideration, which was denied and Mr. Grover subsequently appealed this decision on July 30, 2004. In January 2005, the Virginia Supreme Court upheld the trial decision in our favor and denied Mr. Grover’s petition of appeal. It is unknown if Mr. Grover will file a motion for reconsideration. We believe we have adequate substantive and procedural defenses against all claims made in this matter and no amounts have been accrued in the financial statements for any loss contingency.

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

None.

11

PART II

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

As of February 23, 2005 there were 403 record holders of our common stock.

Quarterly Common Stock Information

Beginning January 29, 2003, our common stock was listed on the Over the Counter Bulletin Board under the symbol CMDZ.OB. From August 7, 2002 until January 29, 2003, our common stock was traded on the Pink Sheets Electronic Quotation System. Previously, our common stock was traded on the Nasdaq SmallCap Market, under the symbol CMDL.

The following table sets forth, for each quarterly period in 2004 and 2003, the high and low closing stock prices during the quarter in the over-the-counter market for our common stock. These quotations reflect inter-dealer prices without retail markup, markdown or commission and may not represent actual transactions.

	2004				2003
Fiscal Quarters	High		Low		High		Low
First Quarter	$	5.10	$	2.60	$	1.51	$	0.55
Second Quarter	$	3.25	$	1.95	$	3.00	$	0.58
Third Quarter	$	2.60	$	1.17	$	2.45	$	1.30
Fourth Quarter	$	1.35	$	0.90	$	3.50	$	2.00

We have never paid a dividend on our common stock and our Board of Directors currently does not intend to consider the payment of cash dividends on our common stock. In connection with financings described elsewhere in this document, we are restricted from declaring or paying any dividends or distributions on our outstanding common stock.

Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” of Comdial’s definitive proxy statement for the 2004 annual meeting of stockholders.

Recent Sales of Securities

We have not sold any securities, registered or otherwise, within the past three months.

Options

We issued stock options to our employees and non-employee directors pursuant to the 2002 Employee and Non-Employee Director Stock Incentive Plan (the “2002 Empl/Non-Empl/Dir SO”) which plan has been approved by the security holders as follows:

GRANT DATE	PLAN NAME	NUMBER OF SHARES UNDERLYING OPTIONS	EXERCISE PRICE PER SHARE ($)	EXPIRATION DATE
1/5/04	2002 Empl/Non-Empl/Dir SO	228,999	2.60	1/5/14
1/14/04	2002 Empl/Non-Empl/Dir SO	67	2.75	1/14/14
2/2/04	2002 Empl/Non-Empl/Dir SO	67	3.25	2/2/14
2/17/04	2002 Empl/Non-Empl/Dir SO	67	3.95	2/17/14
3/16/04	2002 Empl/Non-Empl/Dir SO	2,666	3.75	3/16/14
4/5/04	2002 Empl/Non-Empl/Dir SO	667	2.75	4/5/14
4/26/04	2002 Empl/Non-Empl/Dir SO	667	2.05	4/26/14
4/30/04	2002 Empl/Non-Empl/Dir SO	1,333	2.20	4/30/14
5/14/04	2002 Empl/Non-Empl/Dir SO	3,999	2.50	5/14/14
5/17/04	2002 Empl/Non-Empl/Dir SO	1,333	2.50	5/17/14
5/24/04	2002 Empl/Non-Empl/Dir SO	667	3.00	5/24/14
5/26/04	2002 Empl/Non-Empl/Dir SO	530,000	2.60	5/26/14
6/1/04	2002 Empl/Non-Empl/Dir SO	2,666	2.50	6/1/14
6/28/04	2002 Empl/Non-Empl/Dir SO	1,333	2.00	6/28/14
7/1/04	2002 Empl/Non-Empl/Dir SO	72,000	2.00	7/1/14
7/6/04	2002 Empl/Non-Empl/Dir SO	67	2.01	7/6/14
7/19/04	2002 Empl/Non-Empl/Dir SO	67	2.20	7/19/14
7/26/04	2002 Empl/Non-Empl/Dir SO	2,000	2.20	7/26/14
8/16/04	2002 Empl/Non-Empl/Dir SO	45,000	2.00	8/16/14
8/19/04	2002 Empl/Non-Empl/Dir SO	5,000	2.10	8/19/14
8/26/04	2002 Empl/Non-Empl/Dir SO	1,333	2.15	8/26/14
9/7/04	2002 Empl/Non-Empl/Dir SO	100,000	1.75	9/7/14
9/13/04	2002 Empl/Non-Empl/Dir SO	2,667	1.50	9/13/14
9/27/04	2002 Empl/Non-Empl/Dir SO	2,000	1.20	9/27/14
10/1/04	2002 Empl/Non-Empl/Dir SO	5,000	1.17	10/1/14
10/4/04	2002 Empl/Non-Empl/Dir SO	67	1.00	10/4/14
10/11/04	2002 Empl/Non-Empl/Dir SO	1,333	0.97	10/11/14
10/20/04	2002 Empl/Non-Empl/Dir SO	667	0.95	10/20/14
11/16/04	2002 Empl/Non-Empl/Dir SO	30,000	1.10	11/16/14
11/22/14	2002 Empl/Non-Empl/Dir SO	667	1.10	11/22/14
11/29/04	2002 Empl/Non-Empl/Dir SO	1,400	1.12	11/29/14
12/14/04	2002 Empl/Non-Empl/Dir SO	1,333	1.15	12/14/14

12

There were no underwriters involved in connection with any transaction set forth above. Each of the issuances of securities described above was deemed to be exempt from registration pursuant to Section 4(2) of the Securities Act and Regulation D promulgated there under as a transaction not involving any public offering. In each of the above transactions, the recipients of securities represented their intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued.

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical financial data are derived from our consolidated financial statements. When you read this selected historical financial data, it is important that you read along with it the historical financial statements and related notes in our annual financial statements included elsewhere in this report, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which follows selected financial data.

FIVE YEAR FINANCIAL DATA

Selected Consolidated Statements of Operations Data For the Years Ended December 31:

In thousands, except per share amounts

	2004			2003			2002		2001			2000
Net sales	$	39,583		$	47,941		$	51,721	$	76,167		$	89,564
(Loss) income, before income taxes		(7,678	)		(6,091	)		6,486		(21,155	)		(47,864	)
Net (loss) income		(7,678	)		(6,091	)		6,486		(21,155	)		(63,264	)
(Loss) income applicable to common stock		(7,678	)		(6,091	)		7,202		(21,155	)		(63,264	)
(Loss) earnings per common share:
Basic		(0.82	)		(0.70	)		3.59		(34.45	)		(103.20	)
Diluted		(0.82	)		(0.70	)		3.10		(34.45	)		(103.20	)

Effective November 26, 2002, we effectuated a reverse stock split at a ratio of one share for every fifteen shares of our common stock. As a part of the reverse stock split, we retired all treasury stock. All share and per share data have been adjusted to give retroactive effect to the reverse stock split. There was no effect on par value per share of $0.01.

Selected Consolidated Balance Sheet Data

December 31,

In thousands	2004			2003			2002		2001			2000
Current assets	$	16,261		$	13,014		$	19,154	$	23,084		$	33,152
Total assets		30,379			27,676			40,620		43,736			71,178
Current liabilities		25,043			8,959			13,290		20,634			41,145
Long-term debt and other long-term liabilities		10,377			24,116			26,991		32,742			18,518
Stockholders’ (deficit) equity		(5,041	)		(5,399	)		339		(9,640	)		11,515

13

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

The following discussion is intended to assist the reader in understanding and evaluating our financial condition and results of operations. This review should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this report. This analysis attempts to identify trends and material changes that occurred during the periods presented.

Overview

During the past four years, our net sales levels have decreased from the previous year’s activity. Primary causes for the decrease include, but are not limited to:

• Negative trends in the telecommunications equipment marketplace;

• Pricing pressures in a very competitive market;

• Significant reduction in sales prices of products due to technological evolution;

• Contraction of market focus from the United States and several international countries, including South America and Canada, to a primary focus on the United States;

• Negative effects of our restructuring program implemented due to the necessity to reduce headcount, including the outsourcing of substantially all of our manufacturing requirements; and,

• Discontinuance or sale of several unprofitable product lines and programs, including Avalon and Array.

The decline in revenue from enterprise voice communications systems is attributable in part to the significant investments in these systems made by enterprises in the late 1990s in anticipation of Year 2000. We believe enterprises have been reluctant to make additional investments in voice communications systems until their existing investments have been fully amortized over their 7-10 year useful life. In addition, we believe many customers are hesitant to invest in traditional voice communications systems as they are anticipating the widespread adoption of next-generation communications systems, such as IP telephony systems.

Since the 2002 financial restructuring, we have focused a significant amount of management’s efforts at stabilizing the business, increasing market share, re-establishing our relationships with our wholesale distributors and dealer partners, focusing our product development efforts on IP-PBX related products and improving gross margins and cash flow from operations.

The key/hybrid voice switching market that we have primarily operated in has declined in system line shipments since 2000. As reported by Phillips Infotech (InfoTrack for Enterprise Communications, Third Quarter 2004 Report), the IP-PBX market that much of our primary product development efforts are focused on, however, is expected to increase in system line shipments 23%, 20%, 20%, and 19% for the years 2005 through 2008, respectively. In the future, it will be important to increase our market share in the IP-PBX market.

In the first quarter of 2004, we hired a new president and CEO, Neil P. Lichtman, to lead us in our efforts to increase revenue from both current and new channels and to improve profitability.

In the first quarter of 2005, we announced a modification to our product distribution strategy. Previously, our network of authorized dealers located throughout North America purchased our products from our authorized distributors. The newly announced Program allows approximately 150 pre-qualified dealers (the “Dealers”) the opportunity to purchase product direct from us. In connection with the Program, we enhanced our internal processes to allow for same-day or next-day product shipments to the Dealers to meet market demand. Management feels that the Program will improve our reaction time in competitive situations and will improve our business relationship with the Dealers.

We continue our efforts at establishing new business development relationships focused on augmenting our penetration into the IP telephony marketplace. Our distribution agreement with Tech Data Product Management, Inc. represents a successful accomplishment in this strategic plan.

Our strategic shift in our distribution model is aimed at improving our ability to penetrate the IP telephony marketplace. As disclosed above, the key/hybrid voice switching market continues to decrease in size and opportunity and it is important to shift our sales focus into the IP-PBX marketplace.

Critical Accounting Policies and Estimates

Our consolidated financial statements 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 their more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue using the guidance from SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements”, Staff Accounting Bulletin No. 104, “Revenue Recognition, Corrected Copy”, and the American Institute of Certified Public Accountants Statement of Position No. 97-2, as amended, on “Software Revenue Recognition.” We allow our distributors to return unsold product when they meet Company-established criteria as outlined in our 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

14

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, distributor price protection 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. In the third quarter of 2004, we began selling five-year extended warranties on certain of our products. 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.

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.

Inventory

We measure our inventories at lower of cost or market. For those items that are manufactured by our outsourcing contractors, cost is determined using standards that we believe approximate the 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 December 31, 2004 and 2003, all net deferred tax assets were reduced by a valuation allowance. In later years, after we cease 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.

Due to our three-year cumulative basis losses, we recorded a valuation allowance equal to our net deferred tax assets of $44.3 and $41.5 million for the years ended December 31, 2004 and 2003, respectively. For the years ended December 31, 2004, 2003 and 2002, we recorded an increase (decrease) of our valuation allowance of $3.2 million, $(0.4) million and $(0.5) million, respectively. Approximately $3.6 million of the valuation allowance relates to tax benefits from a pension obligation that will be credited to other comprehensive income when realized.

At December 31, 2004, Comdial had net operating loss and credit carryovers of approximately $71.4 million and $1.4 million respectively, expiring beginning in 2005 through the year 2024. However, we experienced a change in control in 2002, pursuant to the provisions of IRC §382 and are subject to limitations on annual net operating loss deductions. As such, a significant portion of the net operating losses and tax credits are expected to expire prior to utilization.

Long-lived Assets, including Goodwill and Other Intangibles

Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) establishes a single accounting model for long-lived assets to be disposed of by sale. For long-lived assets that are held for use, we compare the forecasted undiscounted net

15

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. A considerable amount of judgment is required in calculating this impairment charge, principally in determining financial forecasts. Unanticipated changes in market conditions could have a material impact on our projected cash flows. Differences in actual cash flows as compared to the projected cash flows could require us to record an impairment.

SFAS No. 142, “Goodwill and Other Intangible Assets” 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 at least an annual basis. Each October 1, 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, we then determine 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, we write down goodwill to its implied fair value. Our goodwill relates to the messaging business segment. We performed our annual impairment review in October 2004 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. A considerable amount of judgment is required in calculating this impairment analysis, principally in determining discount rates, financial forecasts and allocation methodology. Unanticipated changes in market conditions could have a material impact on our projected cash flows. Differences in actual cash flows as compared to the projected discounted cash flows could require us to record an impairment loss.

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 independent actuarial valuation. This valuation has a number of variables, not only to estimate our benefit obligation, but also to provide us with minimum funding 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.

On December 31, 2004, the projected benefit obligations exceeded the market value of the plan assets (adjusted for accruals) by $9.7 million. Our actuarial estimates have not been updated since December 31, 2004. If our investment return and other actuarial assumptions remain unchanged, we will have to pay approximately $0.2 million during 2005 into the pension plan.

Commitments and Contingencies

Management’s current assessment of the claims that have been asserted against us 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 us 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-K, are forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are not historical facts but rather are based on certain expectations, estimates and projections about our industry, our beliefs and our assumptions. These risks could cause our actual results for 2005 and beyond to differ materially from those expressed, implied or forecasted in any forward-looking statement made by, or on behalf of, us. The risks and uncertainties include, but are not limited to, those discussed in “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” set forth in Part I above.

Recent Developments

As of January 31, 2005, we were not in compliance with our financial covenant associated with the Silicon Valley Bank (the “Bank”) credit facility and are currently working with the Bank to determine alternatives related to the credit facility (see Note 1 to the consolidated financial statements). Consequently, as a result of this default, the bank may cease making loans to us or could accelerate and declare all amounts due, which was $2.3 million as of December 31, 2004.

Additionally, we did not make our quarterly interest payments totaling $0.5 million due on March 31, 2005 for our 2002 private placement debt, including amounts owed to Winfield Capital Corp., and the 2004 bridge financing. As such, these debt obligations are in default and are therefore classified as current liabilities at December 31, 2004 in the accompanying consolidated balance sheet. Our note holders may, due to the default, require that all or any portion of the outstanding principal of approximately $24.3 million and outstanding accrued interest of approximately $0.5 million be paid immediately.

In connection with our continued focus on improving cash flow from operations, we initiated a restructuring plan (the “2005 Plan”) during the first quarter of 2005. Pursuant to the 2005 Plan, approximately 25 employees were notified that their positions would be eliminated. These employees will receive severance and medical, life and other insurance benefits, as applicable. We will reflect the charges associated with the 2005 Plan in the periods that the restructuring activities are effectuated and the costs are incurred.

16

On April 14, 2005, Alan Kessman, one of our directors and chairman of the executive committee and audit committee, Alfred Rapetti, one of our directors, Stanley Blau, one of our directors and Robert Doretti, one of our directors resigned from these positions.

SEGMENT REPORTING

RESULTS OF OPERATIONS

Selected consolidated statements of operations for the three years ended December 31, 2004, 2003 and 2002, are as follows:

In thousands	2004			2003			2002
Business segment net sales:
Switching	$	31,449		$	37,464		$	36,892
Messaging		6,981			9,362			13,240
CTI & Other		1,153			1,115			1,589
Net sales		39,583			47,941			51,721
Cost of goods sold		25,102			31,477			34,505
Gross profit		14,481			16,464			17,216
Selling, general & administrative		16,001			15,453			20,572
Engineering, research & development		3,647			3,450			5,292
Stock compensation expense		24			26			460
Restructuring		532			—			—
Impairments of long-lived assets		157			365			962
(Gain) loss on disposal of assets		(78	)		(3	)		350
Interest expense		2,500			3,279			7,803
Gain on senior debt restructurings		—			—			(14,883	)
Gain on other liability restructurings		—			—			(3,848	)
Gain on lease renegotiation		(642	)		—			(2,834	)
Gain from arbitration award		—			—			(2,942	)
Miscellaneous expense (income) - net		18			(15	)		(202	)
(Loss) income before income taxes		(7,678	)		(6,091	)		6,486
Income tax expense		—			—			—
Net (loss) income	$	(7,678	)	$	(6,091	)	$	6,486
(Loss) income per share:
Basic	$	(0.82	)	$	(0.70	)	$	3.23
Diluted	$	(0.82	)	$	(0.70	)	$	2.79

The following table reflects the gross profit margins for our various business segments.

	2004		2003		2002
Business Segment:
Switching	$	10,996	$	12,284	$	12,077
Messaging		2,759		3,716		5,069
CTI & Other		726		464		70
Gross profit	$	14,481	$	16,464	$	17,216

17

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

	2004		2003		2002
PERCENTAGES OF NET SALES:
Net sales	100	%	100	%	100	%
Cost of goods sold	63	%	66	%	67	%
Gross profit	37	%	34	%	33	%
Operating expenses
Selling, general & administrative	41	%	32	%	40	%
Engineering, research & development	9	%	7	%	10	%
Stock compensation expense	0	%	0	%	1	%
Restructuring	1	%	—		—
Impairments of long-lived assets	1	%	1	%	2	%
Total operating expenses	52	%	40	%	53	%
Operating loss	(15	)%	(6	)%	(19	)%
Other expense (income)	4	%	7	%	(32	)%
Net (loss) income	(19	)%	(13	)%	13	%

2004 COMPARED TO 2003

Net sales for 2004 decreased by 17% to $39.6 million, compared with $47.9 million in 2003. The primary factor in the decrease of sales was the overall market contraction.

Gross profit decreased by 12% in 2004 to $14.5 million, compared with $16.5 million in 2003, primarily due to the decrease in net sales described above. Gross profit, as a percentage of sales, increased from 34% in 2003 to 37% for 2004. This increase is primarily due to a shift in the product mix to higher margin products in 2004 than in 2003.

We record provisions related to product obsolescence of our products, which are charged to cost of goods sold. For the years 2004 and 2003, provisions for obsolescence totaled $0.1 million and $1.8 million, respectively. The provision for obsolescence and valuation for 2003 was higher primarily due to the lower than anticipated demand for discontinued and refurbished products, which we had expected to sell. Future reserves will be dependent on estimates of the recoverability of inventory costs and shifts in product demands.

We record accruals related to estimated warranty claims that may result from product warranties offered to our customers, which are charged to cost of goods sold. 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 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. In 2004, the warranty accrual remained relatively flat as compared to 2003. 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. While we use the best information available to us to make our estimates of warranty claims, actual results and experience could differ from our estimates and revisions to the warranty estimates could be required.

Selling, general and administrative expenses (“SG&A”) increased in 2004 by 4% to $16.0 million compared with $15.5 million for 2003. This change was primarily due to increases in rent and payroll and related expenses, partially offset by a decrease in depreciation expense. During 2004, we increased headcount in the sales and marketing departments in order to increase revenue opportunities. SG&A expenses, as a percentage of sales for 2004, increased to 40% compared with 32% for 2003.

Engineering, research and development expenses increased in 2004 by 6% to $3.6 million compared with $3.5 million for 2003. Engineering expenses, as a percentage of sales for 2004, increased to 9% compared with 7% for 2003.

We initiated a restructuring plan (the “Plan”) during the first quarter of 2004. Pursuant to the Plan, approximately 20 employees were notified as of March 15, 2004 that their positions would be eliminated. These employees received severance based on length of service with us and/or employment agreements, as applicable, of approximately $0.3 million. Until March 2004, Nickolas A. Branica served as our CEO. In March 2004, Mr. Branica’s employment relationship with us terminated. Pursuant to Mr. Branica’s employment agreement as amended, he will receive as severance an amount equal to twelve months of his annual base salary at the rate in effect on the date his employment ended. Mr. Branica will receive medical, life and other insurance benefits for a period of up to twelve months following his employment separation. In addition to his severance as outlined above, all of Mr. Branica’s stock options were immediately vested at the time of his termination. In connection with the modification of Mr. Branica’s stock option agreement, we recorded stock compensation expense of approximately $0.2 million for the quarter ended March 31, 2004.

18

Impairments of long-lived assts amounted to $0.2 million and $0.4 million in 2004 and 2003, respectively. We evaluate our long-lived assets, consisting of property and equipment, goodwill, and capitalized software, periodically, in accordance with the critical accounting policy outlined above. We will continue to perform such evaluations and, as we develop and restructure our business, further impairment charges may be warranted and will be recorded when estimable.

Interest expense decreased in 2004 by 24% to $2.5 million compared with $3.3 million in 2003. While our average carrying balances of indebtedness did not materially change between 2004 and 2003, our interest expense net-decreased from (i) lower amortization of deferred financing costs ($0.8 million in 2004 versus $1.6 million in 2003) and (ii) lower average outstanding balances on our capital lease obligations. Our interest expense net-increased as a result of (i) outstanding balances on a credit facility that we executed in April 2004, and (ii) increasing interest charges that arise from use of the effective interest method to amortize certain discounted notes payable. In our application of the effective interest method, we apply a fixed effective interest rate (which is higher than the stated interest rate) to the carrying value of each class of discounted debt. In this manner, the carrying value of the debt is increased and, accordingly, future interest expense increases.

During 2004, we completed a bridge financing that included the issuance of $9.0 million face value of convertible debt and warrants to acquire common stock. The proceeds from this financing were allocated to the securities sold on a relative fair value basis. We discounted the proceeds associated with this financing with an allocation to a beneficial conversion option embedded in the notes. We will amortize the aggregate discounts of $9.0 million on the notes to interest expense over the term of the notes using the effective interest method. Amortization of debt discount and deferred financing costs associated with the notes was minimal during the year ended December 31, 2004. However, amortization of debt discount and deferred financing costs associated with the financing during the years ended December 31, 2005 and 2006 are estimated to be $0.1 million and $9.7 million, respectively.

Loss before income taxes, as a result of the foregoing, was $7.7 million in 2004 as compared with $6.1 million before income taxes in 2003. Major factors contributing to the increased loss for 2004 were the decrease in sales revenue and the restructuring costs.

We did not generate taxable income during 2004 or 2003 and, therefore, we did not record any income tax expense for those periods. We also provided a valuation allowance on the full amount of our net deferred tax assets, consisting primarily of future benefits of our net operating loss carryforwards, because of uncertainty regarding its realizability.

2003 COMPARED TO 2002

Net sales for 2003 decreased by 7% to $47.9 million, compared with $51.7 million in 2002. The primary factor in the decrease of sales was the overall market contraction.

Gross profit decreased by 4% in 2003 to $16.5 million, compared with $17.2 million in 2002, primarily due to the decrease in net sales described above. Gross profit, as a percentage of sales, increased from 33% in 2002 to 34% for 2003. This increase is primarily due to a change in product mix, as we sold more higher margin products in 2003.

Comdial records provisions related to product obsolescence of its products, which are charged against gross profit. For the years 2003 and 2002, provisions for obsolescence totaled $1.8 million and $0.9 million, respectively. The provision for obsolescence and valuation for 2003 was higher primarily due to the lower than anticipated demand for discontinued and refurbished products, which we had expected to sell during 2003.

In 2003, we decreased the warranty accrual by $0.2 million 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.

SG&A decreased in 2003 by 25% to $15.5 million compared with $20.6 million for 2002. This decrease primarily resulted from downsizing the work force and more closely controlling costs. In addition, Comdial recorded bad debt expense in 2002 of $0.4 million compared with ($0.1) million in 2003. SG&A expenses, as a percentage of sales for 2003, decreased to 32% compared with 40% for 2002.

Engineering, research and development expenses decreased in 2003 by 34% to $3.5 million compared with $5.3 million for 2002, primarily due to the downsizing of the work force and lower amortization of software development costs. Engineering expenses, as a percentage of sales for 2003, decreased to 7% compared with 10% for 2002.

In connection with the bridge financing in 2002, warrants to purchase 100,000 shares of common stock were issued to two executive officers of Comdial. The warrants are exercisable at $0.15 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 Associates, L.P. (“Commonwealth”) received 16,667 shares of our common stock upon signing of an advisory agreement on June 7, 2002. Expense of $0.1 million was recorded based on the stock price on that date. Previously, directors could elect to defer receipt of their performance based stock options; however, in 2002, we settled all unearned amounts due to former directors with agreed upon cash payments and recognized income of $0.1 million related thereto. There were no significant stock based compensation awards in 2003.

19

In accordance with SFAS No. 144, we evaluate long-lived assets for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. In 2003, prior to the Soundpipe acquisition, we 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 $0.4 million were written off in 2003 and are recorded as impairments of long-lived assets in the consolidated income statement. In 2002, as a result of the outsourcing of the manufacturing operations, the majority of the manufacturing assets were sold or otherwise disposed of. Our projected undiscounted cash flows related to those assets were less than the net book value of the assets associated with the business. Such analysis resulted in impairment loss of fixed assets in the amount of $0.2 million for 2002. As part of our decision to outsource manufacturing and reduce the number of product lines to a more appropriate level in 2002, certain capitalized software development costs were impaired. Capitalized software development costs relating to product lines that were to be discontinued were considered impaired due to our inability to realize any future benefit from these assets. The impairment loss of capitalized software amounted to $0.7 million in 2002.

Interest expense decreased in 2003 by 58% to $3.3 million compared with $7.8 million in 2002. This was primarily due to the accretion of the discount on our debt.

During 2002, we restructured our senior debt with Bank of America and recorded a gain of $14.9 million. In addition, we restructured liabilities with certain other vendors and creditors, including terminating the Retirement Benefit Restoration Plan and other postretirement benefits; we recorded a gain of $3.8 million on these restructurings. We also renegotiated our leases with Relational Funding Corporation and its assignees and recorded a gain of $2.8 million. We also recognized a previously deferred gain on the sale of Array assets to ePHONE of $1.3 million and a gain of $1.6 million on a settlement with ePHONE.

Income before income taxes, as a result of the foregoing, was a loss of $6.1 million in 2003 as compared with income of $6.5 million before income taxes in 2002. The major factor contributing to the income in 2002 was the debt restructurings discussed above. Major factors contributing to the loss for 2003 include the decrease in sales and other factors such as increased inventory write-offs due to the lower than anticipated demand for discontinued and refurbished products.

We did not generate taxable income during 2003 or 2002 and, therefore, did not record any income tax expense for those periods. We have provided a full valuation allowance on our net deferred tax assets, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its realizability.

LIQUIDITY AND CAPITAL RESOURCES

Since 2002, we have financed our operations and capital requirements principally through net proceeds of approximately $25 million from our current debt holders and borrowings under bank lines of credit and equipment lease arrangements. Historically, our liquidity and capital resource requirements have been highly dependent on cash funding from external sources. Until our operations generate sufficient cash flow from operations to cover capital expenditures and debt service, we might be required either to convert interest-bearing debt securities to equity securities or to raise additional cash through additional debt or equity-based capital transactions. Management believes improvements in cash flow from operations will be based, to a large extent, on moving Comdial further into the IP-PBX market, which is projected to grow in the next four years, on improving gross margins for the IP-PBX products and on minimizing the overhead costs associated with our operations. The expansion of our IP-PBX sales activity will be based on the recently introduced CONVERSip^TM product lines. Management believes that CONVERSip^TM sales will increase sequentially quarter to quarter for 2005.

The consolidated financial statements have been prepared assuming that we will continue as a going concern for a reasonable period. However, we have incurred losses of $7.7 million and $6.1 million during the years ended December 31, 2004 and 2003, respectively, and used significant amounts of cash in our recent operating activities. In addition, during the first fiscal quarter of the year ending December 31, 2005, we defaulted on certain terms and conditions of debt instruments that had a carrying value of $15.9 million as of December 31, 2004 (face value of $26.6 million as of December 31, 2004), which defaults have not been cured by us or waived by the creditors and, as a result, payment of such debt could be accelerated by the creditors. The negative operating trends experienced by us and the debt defaults have resulted in a working capital deficiency of $8.8 million as of December 31, 2004. These conditions raise substantial doubt about our ability to continue as a going concern.

Cash Used in Operations

In 2004, we used approximately $3.4 million of cash in operating activities, primarily due to our net loss of $7.7 million, decreases in accounts payable and increases in prepaid expenses, offset by decreases in inventory.

In 2003, operating activities provided approximately $3.7 million of cash, primarily due to decreases in accounts receivable and prepaid expenses, offset by our net loss of $6.1 million and a decrease in accounts payable.

20

Cash Used in Investing Activities

During 2004, we used $2.2 million for capitalized software additions as compared to $2.1 million during 2003.

Cash from Financing Activities

In 2004, we received $10.6 million through financing activities. This was due primarily to $9.0 million of proceeds from the issuance of bridge notes and $2.3 million under our line of credit agreement. During 2003, we used $1.6 million for financing activities due primarily to an increase in restricted cash.

We do not have any material commitments for capital equipment. Additional future debt or equity capital requirements will depend on many factors, including our working capital requirements for our operations and our internal free cash flow from operations.

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

December 31, In thousands	2004			2003
Cash and cash equivalents	$	6,784		$	2,931
Current maturities of debt		16,101			389
Working capital		(8,773	)		4,055

Our working capital deficit is primarily due to the reclassification of $13.7 million of long-term debt to current due to our failure to pay the accrued quarterly interest due on March 31, 2005 which created an event of default on the loans.

Our sales and working capital can be impacted by the extent of product inventories carried by our distribution partners at a given point in time. Fluctuations of these inventory levels can have a dramatic impact on our sales and cash position. We continue to monitor our working capital requirements and are investigating additional opportunities to raise funds to support our business goals. Since 2002, we have raised over $25 million in funding from our current debt holders.

In March 2004, we completed a bridge financing transaction (“2004 Bridge”) resulting in gross proceeds to Comdial of $9.0 million (net proceeds of $8.2 million) and in April 2004 we obtained a $2.5 million asset-backed credit facility with a bank.

As of December 31, 2004, our cash and cash equivalents were higher than December 31, 2003 by $3.9 million primarily due to the cash received from the 2004 Bridge financing. Working capital increased by $0.8 million primarily due to the 2004 Bridge financing.

We have a Master Lease Agreement with Relational Funding Corporation and its assignees (collectively “RFC”). On March 30, 2004, the Company and RFC reached agreement to further reduce the total payments due under the capital leases from a combined balance of approximately $1.2 million to a payout schedule over 12 months totaling approximately $0.5 million. In April 2004, we purchased a certificate of deposit to secure an irrevocable Standby Letter of Credit in the amount of $0.5 million as required by RFC. On a quarterly basis, as payments are made to RFC under the agreement, the Letter of Credit and the certificate of deposit can be reduced by the amount of the payments made during the respective quarter. The Letter of Credit is recorded as restricted cash in our balance sheet.

Available Borrowing

On April 29, 2004, we executed a credit facility with the Bank, which allows for borrowing against certain of our accounts receivable up to a maximum of $2.5 million. Loans against the line bear interest at a rate equal to the prime rate plus three (3) percentage points per annum and are secured by all of our assets. Additional terms include a $1,000 per month collateral monitoring fee and an unused line fee in an amount equal to 0.375% per annum of the average daily unused and undisbursed portion. A termination fee applies if we terminate the credit facility within twelve (12) months. All present and future debt is subordinate to the outstanding obligations related to this facility. The credit facility matures on October 29, 2005 and contains a financial covenant related to net worth. As of December 31, 2004, the outstanding borrowings under the credit facility totaled $2.3 million. As of January 31, 2005, we were not able to comply with the financial covenant associated with the credit facility and are currently working with the Bank to determine alternatives related to the credit facility. As a result of the default, the Bank may cease making loans and could accelerate and declare all amounts due, which was $2.3 million as of December 31, 2004. The Bank agreed to forbear from exercising its rights and remedies as a result of the default through March 31, 2005.

Additionally, we did not make our quarterly interest payments totaling $0.5 million due on March 31, 2005 on our 2002 private placement debt, including amounts owed to Winfield Capital Corp., and the 2004 bridge financing debt, which had an aggregate carrying value of $13.6 million as of December 31, 2004 (aggregate face value of $24.3 million). Consequently, all such debt is in default and carried as a current liability in the December 31, 2004 balance sheet. While the note holders have not indicated their intention to require immediate payment of all or any portion of the outstanding principal of $24.3 million, and accrued interest of $0.5 million, they have the right to do so.

21

We have a working capital deficiency of $8.8 million as of December 31, 2005. Our principal sources of liquidity at December 31, 2004 consisted of the remaining available borrowings under the aforementioned credit facility, which is in default, and approximately $6.8 million of cash and cash equivalents, compared to approximately $2.9 million in cash and cash equivalents at December 31, 2003. Available borrowings under the credit facility as of December 31, 2004 were approximately $0.2 million and, due to defaults, there can be no assurance that we can draw this amount and, in fact, could be required by the Bank to repay the entire outstanding balance.

Our cash position is deteriorating. As of March 31, 2005, our cash balance was approximately $2.7 million. Considering our projected cash requirements for 2005, our available cash resources will be insufficient by approximately $3.0 million to allow us to continue as a going concern. At current operating levels, management estimates that our current cash reserves will be exhausted by the second quarter of 2005. Therefore, we will be required to work with the Bank to determine alternatives related to the credit facility, as well as raise additional equity and/or debt financing in order to continue to operate. We are actively seeking additional funding, including from certain of our current debt holders to support this projected cash shortfall. There are no formal committed financing arrangements in place and there can be no assurance that any additional financing will be available on acceptable terms, if at all. We are also evaluating the merits of a financial restructuring and other alternatives that would potentially improve our liquidity and financial position.

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that may be necessary if we are unable to continue as a going concern.

CONTRACTUAL OBLIGATIONS

The following table sets forth our contractual obligations as of December 31, 2004:

In thousands	Payments due by period
Contractual obligations	Total		2005		2006 - 2007		2008 - 2009		2010 & thereafter
Long-Term Debt Obligations (1)	$	27,347	$	1,892	$	25,455	$	—	$	—
Capital Lease Obligations (1)		141		132		5		4		—
Credit Facility (1)		2,326		2,326		—		—		—
Operating Lease Obligations (2)		5,156		941		1,990		2,135		90
Purchase Obligations (3)		10,160		9,873		287		—		—
Other Obligations (4)		1,380		1,191		100		89		—
Total	$	46,510	$	16,355	$	27,837	$	2,228	$	90

(1) See Note 8 of the consolidated financial statements. The obligations reflect the original maturity dates of the notes but as a result of the default due to non-payment of the accrued interest due March 31, 2005, the notes are callable.

(2) Comdial has various operating lease obligations relating to office and warehouse space. The lease for our corporate headquarters includes escalation clauses. The escalating payment requirements are included in the schedule above.

(3) In February 2002, we entered into an agreement with a supplier to return and repurchase over time certain electronic products which we had previously received under non-cancelable/non- returnable purchase orders. We have executed a promissory note in the amount of $2.1 million in favor of the supplier when the products were initially purchased. Concurrent with the execution of the purchase agreement, the note was cancelled and we recognized a $2.1 million gain. Under the terms of the agreement, we are required to purchase a total of $2.1 million in products by January 15, 2007 in minimum increments of $0.03 million per month. As of December 31, 2004, we have repurchased $1.3 million of the specified products from the supplier.

We outsource substantially all of our manufacturing requirements. As of December 31, 2004, we have outstanding purchase obligations of approximately $9.4 million with our outsourcing contractors that could not be canceled without significant penalties. In addition, our outsourcing contractors acquire fabricated parts from various suppliers.

(4) On October 5, 2000, William G. Mustain resigned as president and chief executive officer of Comdial. On the same date, we 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 our Retirement Benefit Restoration Plan (the “Retirement Plan”). In 2001, we made the initial payment of $0.6 million under the Retirement Plan. However, on June 30, 2001, we notified Mr. Mustain that we would not make payment of the second $0.6 million installment due under the Plan because of our financial condition, as permitted under the terms of the agreement with Mr. Mustain. On December 27, 2001, we 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,

22

we 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 Retirement Plan was liquidated in the first quarter of 2002, when $1.1 million was recognized as part of the overall plan liquidation. All amounts due Mr. Mustain have been accrued as of December 31, 2004.

During 2002, we reached separate agreements (the “Agreements”) with the three former executives who still had vested benefits under the Retirement 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.

RELATED PARTY TRANSACTIONS

On March 12, 2004, we closed a bridge financing transaction involving the private placement of 90 units at a price of $0.1 million per unit resulting in gross proceeds to us of $9.0 million (“2004 Bridge Financing”). Each unit includes a warrant to purchase 20,000 shares of our voting common stock at an exercise price of $3.38 per share until February 17, 2007 (the “2004 Bridge Warrants”) and a $0.1 million subordinated convertible note which includes interest payable quarterly at the annual rate of 8%. Commonwealth served as placement agent for the 2004 Bridge Financing in exchange for the payment of certain of its expenses and a cash fee equal to 7.5% of the gross proceeds of the transaction. Our Chairman of the Board of Directors is the co-founder of Commonwealth, and served as its chairman and chief executive officer. Currently, our Chairman of the Board of Directors is also chairman and chief executive officer of Commonwealth Associates Group Holdings, and a managing partner of ComVest Investment Partners, L.P.

Of the gross proceeds from the 2004 Bridge Financing, $3.7 million was received from Comvest Venture Partners, L.P., Shea Ventures, LLC (greater than 5% shareholder of our common stock), PS Capital LLC (whose managing director was Comdial’s Chairman of our Executive Committee), Robert Priddy (greater than 5% shareholder of our common stock) and Neil P. Lichtman, our CEO, all of which are related parties. In addition, we issued 2004 Bridge Warrants to purchase 0.5 million shares of common stock to those same related parties. All 2004 Bridge Warrants were outstanding as of December 31, 2004.

During December 2004, we entered into an agreement with Commonwealth to provide financial advisory and investment banking services. Upon execution of the agreement, we paid Commonwealth $25,000 in cash.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs.” The statement amends Accounting Research Bulletin (“ARB”) No. 43, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. ARB No. 43 previously stated that these costs must be “so abnormal as to require treatment as current-period charges.” SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for fiscal years beginning after the issue date of the statement. The adoption of SFAS No. 151 is not expected to have any significant impact on our financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 29.” APB Opinion No. 29, “Accounting For Nonmonetary Transactions,” is based on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception of nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. The adoption of SFAS No. 153 is not expected to have any impact on our financial condition or results of operations.

In December 2004, the FASB revised its SFAS No. 123 (“SFAS No. 123R”), “Accounting for Stock Based Compensation.” The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be recognized over the period during which the employee is required to provide service in exchange for the award. The provisions of the revised statement are effective for financial statements issued for the first interim or annual reporting period beginning in 2006, with early adoption encouraged. We are currently evaluating the methodology for adoption on the impending effective date. Since we continue to issue options to employees and directors, management does expect this standard to have an impact on our financial condition and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The majority of our debt is in the form of fixed-rate notes. We do not expect changes in interest rates to have a material effect on income or cash flows in 2005 although there can be no assurances that interest rates will not change significantly. We do not believe that a 5% change in interest rates would have a material effect on our consolidated financial position, results of operations or cash flows.

23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors of Comdial Corporation:

We have audited the accompanying consolidated balance sheet of Comdial Corporation (“the Company”) as of December 31, 2004 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2004. Our audit also includes the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comdial Corporation at December 31, 2004, and the consolidated results of its operations and its cash flows for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The Company has incurred recurring net losses, has used significant cash in support of its operating activities and, based upon current operating levels, requires additional capital or significant reconfiguration of its operations to sustain its operations beyond June 30, 2005. In addition, during the first fiscal quarter of the year ending December 31, 2005, the Company defaulted on certain terms and conditions of debt instruments that had a carrying value of $15,969,000 as of December 31, 2004 (face value of $26,643,000 as of December 31, 2004), which defaults have not been cured by the Company or waived by the creditors and, as a result, payment of such debt could be accelerated by the creditors. The negative operating trends experienced by the Company and the debt defaults have resulted in a working capital deficiency of $8,773,000 as of December 31, 2004. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Further information and management’s plans with regard to this uncertainty, including management’s specific plans for restructuring activities, are discussed in the footnotes. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

	/s/ Aidman Piser & Company, P.A.
Tampa, Florida
February 18, 2005, except for Notes 1, 2 and 8, as to which the date is March 31, 2005

24

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS

Stockholders and Board of Directors of Comdial Corporation:

We have audited the accompanying consolidated balance sheet of Comdial Corporation (“the Company”) as of December 31, 2003 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comdial Corporation at December 31, 2003, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

	/s/ Ernst & Young LLP
Tampa, Florida
March 15, 2004

25

Consolidated Balance Sheets

In thousands, except per share amounts	December 31, 2004			December 31, 2003
Assets
Current assets
Cash and cash equivalents	$	6,784		$	2,931
Restricted cash		1,290			1,000
Accounts receivable (less allowance for doubtful accounts: 2004 - $231; 2003 - $266)		3,292			3,765
Inventories		3,834			4,970
Prepaid expenses and other current assets		1,061			348
Total current assets		16,261			13,014
Property and equipment - net		1,809			2,783
Goodwill - net		3,375			3,375
Capitalized software development costs - net		4,615			4,621
Deferred financing costs - net		1,514			1,125
Other assets		2,805			2,758
Total assets	$	30,379		$	27,676
Liabilities and stockholders’ deficit
Current liabilities
Accounts payable	$	3,495		$	4,944
Accrued payroll and related expenses		1,471			826
Accrued promotional allowances		1,721			1,511
Other accrued liabilities		2,246			1,289
Current maturities of long-term debt		132			389
Debt in default		10,178			—
Debt due to related parties in default		5,791			—
Total current liabilities		25,034			8,959
Long-term debt		9			7,939
Long-term debt to related parties		—			5,770
Pension obligations		9,495			8,441
Other long-term liabilities		882			1,966
Total liabilities		35,420			33,075
Commitments and Contingencies (Note 7 and 15)		—			—
Stockholders’ deficit
Common stock, $0.01 par value (Authorized 60,000 shares; issued and outstanding 2004 - 9,819; 2003 - 8,968)		684			676
Paid-in capital		143,074			133,835
Accumulated deficit		(139,147	)		(131,469	)
Accumulated other comprehensive loss - pension obligations		(9,652	)		(8,441	)
Total stockholders’ deficit		(5,041	)		(5,399	)
Total liabilities and stockholders’ deficit	$	30,379		$	27,676

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

26

Consolidated Statements of Operations

	Years Ended December 31,
In thousands, except per share amounts	2004			2003			2002
Net sales	$	39,583		$	47,941		$	51,721
Cost of goods sold		25,102			31,477			34,505
Gross profit		14,481			16,464			17,216
Operating expenses
Selling, general & administrative		16,001			15,453			20,572
Engineering, research & development		3,647			3,450			5,292
Stock compensation expense		24			26			460
Restructuring		532			—			—
Impairments of long-lived assets		157			365			962
Operating loss		(5,880	)		(2,830	)		(10,070	)
Other expense (income)
Interest expense		2,500			3,279			7,803
(Gain) loss on disposal of assets		(78	)		(3	)		350
Gain on senior debt restructurings		—			—			(14,883	)
Gain on other liability restructurings		—			—			(3,848	)
Gain on lease renegotiation		(642	)		—			(2,834	)
Gain from arbitration award		—			—			(2,942	)
Miscellaneous expense (income) - net		18			(15	)		(202	)
(Loss) income before income taxes		(7,678	)		(6,091	)		6,486
Income tax expense		—			—			—
Net (loss) income		(7,678	)		(6,091	)		6,486
Preferred stock dividends		—			—			(284	)
Gain on redemption of preferred stock		—			—			1,000
(Loss) income applicable to common stock	$	(7,678	)	$	(6,091	)	$	7,202
(Loss) income per common share:
Basic	$	(0.82	)	$	(0.70	)	$	3.59
Diluted	$	(0.82	)	$	(0.70	)	$	3.10
Weighted average common shares outstanding:
Basic		9,324			8,758			2,006
Diluted		9,324			8,758			2,325

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

27

Consolidated Statements of Stockholders’ Equity (Deficit)

	Preferred Stock					Common Stock					Deferred Stock Incentive					Paid-in Capital
In thousands	Shares		Amount			Shares		Amount			Shares		Amount
Balance at January 1, 2002	—			—		622		$	93		1		$	201		$	123,226
Issuance of common stock						17			3								59
Issuance of warrants																	6,994
Issuance of convertible notes																	3,545
Issuance of preferred stock	67		$	10,000													(9,000	)
Dividends on preferred stock																	(284	)
Conversion of notes to equity						3,556			533								—
Redemption of preferred stock	(67	)		(10,000	)												10,000
Retirement of treasury shares						(9	)		(1	)							(1,295	)
Warrants exercised						4,329			43								(43	)
Retirement of deferred stock											(1	)		(201	)		85
Net loss
Minimum pension liability adjustment
Comprehensive loss
Balance at December 31, 2002	—			—		8,515			671		—			—			133,287
Issuance of common stock for acquisition						250			3								497
Stock compensation expense																	26
Warrants exercised						203			2								25
Net loss
Minimum pension liability adjustment
Comprehensive loss
Balance at December 31, 2003	—			—		8,968			676		—			—			133,835
Stock compensation expense																	237
Warrants issued with 2004 Bridge Financing																	4,000
Embedded beneficial conversion feature in 2004 Bridge Financing																	5,000
Warrants exercised						832			8								2
Stock options exercised						19			—
Net loss
Minimum pension liability adjustment
Comprehensive loss
Balance at December 31, 2004	—		$	—		9,819		$	684		—		$	—		$	143,074

	Treasury Stock					Accumulated Deficit			Comprehensive Income (Loss)			Accumulated Other Comprehensive Loss
In thousands	Shares		Amount												Total
Balance at January 1, 2002	(9	)	$	(1,296	)	$	(131,864	)		—			—		$	(9,640	)
Issuance of common stock																62
Issuance of warrants																6,994
Issuance of convertible notes																3,545
Issuance of preferred stock																1,000
Dividends on preferred stock																(284	)
Conversion of notes to equity																533
Redemption of preferred stock																—
Retirement of treasury shares	9			1,296												—
Warrants exercised																—
Retirement of deferred stock																(116	)
Net income							6,486		$	6,486						6,486
Minimum pension liability adjustment										(8,241	)	$	(8,241	)		(8,241	)
Comprehensive loss									$	(1,755	)
Balance at December 31, 2002	—			—			(125,378	)					(8,241	)		339
Issuance of common stock for acquisition																500
Stock compensation expense																26
Warrants exercised																27
Net loss							(6,091	)		(6,091	)					(6,091	)
Minimum pension liability adjustment										(200	)		(200	)		(200	)
Comprehensive loss									$	(6,291	)
Balance at December 31, 2003	—			—			(131,469	)					(8,441	)		(5,399	)
Stock compensation expense																237
Warrants issued with 2004 Bridge Financing																4,000
Embedded beneficial conversion feature in 2004 Bridge Financing																5,000
Warrants exercised																10
Stock options exercised
Net loss							(7,678	)		(7,678	)					(7,678	)
Minimum pension liability adjustment										(1,211	)		(1,211	)		(1,211	)
Comprehensive loss									$	(8,889	)
Balance at December 31, 2004	—		$	—		$	(139,147	)				$	(9,652	)	$	(5,041	)

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

28

Consolidated Statements of Cash Flows

	Years Ended December 31,
In thousands	2004			2003			2002
Cash flows from operating activities:
Net (loss) income	$	(7,678	)	$	(6,091	)	$	6,486
Adjustments to reconcile net (loss) income to operating cash flows:
Depreciation and amortization		3,935			4,293			5,563
Impairments of long-lived assets		158			365			962
Amortization of deferred financing costs		355			563			2,888
Accretion of discount on notes		845			1,584			3,230
Gain on debt and other liability restructuring		—			—			(20,146	)
Gain on lease renegotiation		(642	)		—			(2,834	)
Stock compensation expense		24			26			460
Bad debt expense		5			(129	)		636
Restructuring charges		532			—			—
Inventory obsolescence and valuation provision		16			1,750			937
(Gain) loss on sale of assets		(78	)		(3	)		350
Changes in operating assets and liabilities, net of effects from purchase of subsidiary:
Accounts receivable		468			4,648			2,674
Inventory		1,120			(637	)		467
Prepaid expenses and other assets		(1,092	)		1,692			(3,083	)
Accounts payable		(1,476	)		(3,557	)		(1,377	)
Other liabilities		87			(792	)		(4,078	)
Net cash (used in) provided by operating activities		(3,421	)		3,712			(6,865	)
Cash flows from investing activities:
Proceeds received from sale of assets		80			3			279
Purchase of subsidiary, net of cash acquired		—			(15	)		—
Purchase of note receivable		(800	)		—			—
Capital expenditures		(375	)		(251	)		(39	)
Capitalized software additions		(2,194	)		(2,067	)		(719	)
Net cash used in investing activities		(3,289	)		(2,330	)		(479	)
Cash flows from financing activities:
Proceeds from issuance of bridge notes and warrants		3,550			—			525
Proceeds from issuance of bridge notes to related parties		5,450			—			3,475
Proceeds from issuance of private placement debt		—			—			7,850
Proceeds from issuance of private placement debt to related parties		—			—			4,000
Net repayments under revolver agreement		—			—			(5,750	)
Net borrowings under line of credit agreement		2,326			—			—
Additions to capital leases		10			—			—
Proceeds from issuance of common stock		10			27			—
Principal payments on notes payable		—			(169	)		(349	)
Principal payments under capital lease obligations		(493	)		(475	)		(480	)
Increase in restricted cash		(290	)		(1,000	)		—
Net cash provided by (used in) financing activities		10,563			(1,617	)		9,271
Net increase (decrease) in cash and cash equivalents		3,853			(235	)		1,927
Cash and cash equivalents at beginning of year		2,931			3,166			1,239
Cash and cash equivalents at end of year	$	6,784		$	2,931		$	3,166
Supplemental information - Cash paid during the year for:
Interest	$	991		$	682		$	1,209
Interest to related parties		723			495			51
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Common stock issued in connection with acquisition	$	—		$	500		$	—
Accounts payable converted to notes payable		—			—			288
Debt cancelled upon return of inventory to supplier		—			—			2,040
Assets acquired through capital lease transactions		168			—			1,336
Debt converted to preferred stock		—			—			10,000
Redemption of preferred stock		—			—			1,000
Warrants issued in connection with leasing arrangement		—			—			99
Warrants issued in connection with bridge financing		4,292			—			653
Warrants issued to related parties in connection with bridge financing		2,851			—			1,348
Warrants issued in connection with private placement financing		—			—			2,160
Warrants issued to related parties in connection with private placement financing		—			—			2,223
Stock issued in connection with conversion of bridge notes		—			—			133
Stock issued to related parties in connection with conversion of bridge notes		—			—			400

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

29

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2004, 2003 and 2002

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Comdial Corporation and its subsidiaries (together, “Comdial” or the “Company”) is a United States based developer and distributor of business communications systems. Comdial’s principal end-user customers are small to mid-sized offices throughout the U.S. and certain international markets. Our distribution network consists of three major distributors and direct sales to dealers, national account customers and government entities. Beginning in fiscal 2001, the Company outsourced the majority of its manufacturing operations to four suppliers.

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. If sales levels and/or gross margins decline, other operating expenses increase, or other matters arise, management could be required to reassess the recoverability of its assets and possibly record impairment charges or other asset valuation charges, undertake an alternative plan to potentially include further restructuring or changes in the business, or seek additional debt or equity financing.

LIQUIDITY AND MANAGEMENT’S PLANS

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern for a reasonable period. However, the Company has incurred losses of $7.7 million and $6.1 million during the years ended December 31, 2004 and 2003, respectively, and used significant amounts of cash in its recent operating activities. In addition, during the first fiscal quarter of the year ending December 31, 2005, the Company defaulted on certain terms and conditions of debt instruments that had a carrying value of $15.9 million as of December 31, 2004 (face value of $26.6 million as of December 31, 2004), which defaults have not been cured by the Company or waived by the creditors and, as a result, payment of such debt could be accelerated by the creditors. The negative operating trends experienced by the Company and the debt defaults have resulted in a working capital deficiency of $8.8 million as of December 31, 2004. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

On April 29, 2004, the Company executed a credit facility with Silicon Valley Bank (the “Bank”), which allows for borrowing against certain of the Company’s accounts receivable up to a maximum of $2.5 million. Loans against the line bear interest at a rate equal to the prime rate plus three (3) percentage points per annum and are secured by all of the Company’s assets. Additional terms include a $1,000 per month collateral monitoring fee and an unused line fee in an amount equal to 0.375% per annum of the average daily unused and undisbursed portion. A termination fee applies if the Company terminates the credit facility within twelve (12) months. All present and future debt is subordinate to the outstanding obligations related to this facility. The credit facility matures on October 29, 2005 and contains a financial covenant related to net worth. As of December 31, 2004, the outstanding borrowings under the credit facility totaled $2.3 million. As of January 31, 2005, the Company was not able to comply with the financial covenant associated with the credit facility and is working with the Bank to determine alternatives related to the credit facility. As a result of the default, the Bank may cease making loans and could accelerate and declare all amounts due, which was $2.3 million as of December 31, 2004. The Bank agreed to forbear from exercising its rights and remedies as a result of the default through March 31, 2005.

Additionally, the Company did not make its quarterly interest payments totaling $0.5 million due on March 31, 2005 on its 2002 private placement debt, including amounts owed to Winfield Capital Corp., and the 2004 bridge financing debt, which had an aggregate carrying value of $13.6 million as of December 31, 2004 (aggregate face value of $24.3 million) (See Notes 2 and 8). Consequently, all such debt is in default and carried as a current liability in the accompanying December 31, 2004 balance sheet. While the note holders have not indicated their intention to require immediate payment of all or any portion of the outstanding principal of $24.3 million, and accrued interest of $0.5 million, they have the right to do so.

The Company has a working capital deficiency of $8.8 million as of December 31, 2004. It’s principal sources of liquidity at December 31, 2004 consisted of the remaining available borrowings under the aforementioned credit facility, which is in default, and approximately $6.8 million of cash and cash equivalents, compared to approximately $2.9 million in cash and cash equivalents at December 31, 2003. Available borrowings under the credit facility as of December 31, 2004 were approximately $0.2 million and, due to the default, there can be no assurance that the Company can draw this amount and, in fact, could be required by the Bank to repay the entire outstanding balance.

The Company’s cash position is deteriorating. As of March 31, 2005, the Company’s cash balance was approximately $2.7 million. Considering management’s projected cash requirements for 2005, available cash resources will be insufficient by approximately $3.0 million to allow the Company to continue as a going concern. At current operating levels, management estimates that the Company’s current cash reserves will be exhausted by the second quarter of 2005. Therefore, management will be required to work with the Bank to determine alternatives related to the credit facility, as well as raise additional equity and/or debt financing in order to continue to operate. Management is actively seeking additional funding, including from certain of the Company’s current debt holders to support this projected cash shortfall. There are no formal committed financing arrangements in place and there can be no assurance that any additional financing will be available on acceptable terms, if at all. The Company is also evaluating the merits of a financial restructuring and other alternatives that would potentially improve the Company’s liquidity and financial position.

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that may be necessary if the Company is unable to continue as a going concern.

30

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

CASH AND CASH EQUIVALENTS

Cash equivalents are defined as short-term liquid investments with maturities, at the time of purchase, of less than 90 days that are readily convertible into cash.

ACCOUNTS RECEIVABLE

Accounts receivable are recorded at net realizable value, the amount the Company expects to collect on gross customer trade receivables. The Company establishes general reserves for doubtful accounts of varying percentages based on the aging categories of the receivables. The Company also establishes specific reserves for receivables with known collection problems due to circumstances such as liquidity or bankruptcy. Collection problems are identified using an aging of receivables analysis based on invoice due dates. Items that are deemed uncollectible are written off against the allowance for doubtful accounts. Comdial does not generally require collateral for receivables.

The Company generates a significant amount of net sales from three distributors, ALLTEL Supply, Inc., Graybar Electric Company, Inc., and Sprint/North Supply Inc. During the three years ended December 31, 2004, 2003 and 2002, 78%, 86% and 89%, respectively, of the Company’s net sales were generated from these three companies. If any one of these companies either decides to stop selling our products or experiences significant financial difficulties that negatively impact their ability to sell our products, Comdial could potentially experience significant declines in net sales and cash flow performance.

INVENTORIES

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

The Company incurs shipping and handling fees related to inventory that are recorded as a component of cost of sales. All internal handling charges are charged to selling, general and administrative expenses.

PROPERTY AND EQUIPMENT

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

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

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

GOODWILL

The cost in excess of the fair value of net assets of businesses acquired (goodwill) was amortized in 2001 and prior years over periods ranging from 2 to 10 years. Effective January 1, 2002, the Company ceased amortizing goodwill, pursuant to Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.” At December 31, 2004 and 2003, the Company had goodwill of $3.4 million, net of accumulated amortization of $14.0 million.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Comdial incurs costs associated with the development of software related to Comdial’s various products, including development performed by outside contract engineers. The Company accounts for such software costs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Costs capitalized in accordance with SFAS No. 86 are amortized using the straight-line method over their useful lives, which are estimated by the Company to be three years. The total amount of unamortized software development costs is $4.6 million and $4.6 million at December 31, 2004 and 2003, respectively. Accumulated amortization of software development costs is $14.1 million and $11.9 million at December 31, 2004 and 2003, respectively. Total software development costs of $2.2 million, $2.1 million and $0.7 million were capitalized in the years ended December 31, 2004, 2003 and 2002, respectively. Amortization of capitalized software development costs of $2.2 million, $2.4 million and $3.1 million was recorded in the years ended December 31, 2004, 2003 and 2002, respectively.

31

INVESTMENT AND NOTE RECEIVABLE

Debt securities that Comdial Corporation has the ability and intent to hold to maturity are carried at amortized cost. As of December 31, 2004, the Company carries an 8%, $0.8 million face value note receivable that matures in one year as a held-to-maturity debt security in current assets, included in the caption prepaid expenses and other current assets.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs for the fiscal years ended 2004, 2003 and 2002, comprise the majority of engineering, research, and development costs, which were $3.6 million, $3.5 million and $5.3 million, respectively.

IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the Company reviews its non-amortizable long-lived assets, including intangible assets and goodwill for impairment annually, or sooner whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. Other depreciable or amortizable assets are reviewed when indications of impairment exist. Upon such an occurrence, recoverability of these assets is determined as follows. 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. For long-lived assets held for sale, assets are written down to fair value. Fair value is determined based on discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets. Intangibles with indefinite lives are tested by comparing their carrying amounts to fair value. Impairment within 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. 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’s goodwill relates to the messaging business segment.

During 2004, 2003 and 2002, as a result of the Company’s restructuring, discontinuance of certain of its product lines and the initiative to outsource manufacturing, the Company identified certain long-lived assets that were impaired under the approaches described above. Charges for impairment are recorded as a separate component of the Company’s operations.

FUTURE AMORTIZATION EXPENSE OF INTANGIBLE ASSETS

The estimated amortization expense of intangible assets included in the balance sheet as of December 31, 2004, for each of the following five years is as follows:

Year Ending December 31, In thousands	Amortization Expense
2005	$	2,584
2006		2,963
2007		892
2008		63
2009		110
Total	$	6,612

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Prior to terminating the benefits in June 2002, Comdial accrued estimated costs relating to postretirement health care and life insurance benefits. In 2004, 2003 and 2002, Comdial recognized expense of $0, $0 and $3,500, respectively.

REVENUE RECOGNITION

The Company recognizes revenue using the guidance from Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, Staff Accounting Bulletin No. 104, “Revenue Recognition, Corrected Copy”, and AICPA Statement of Position 97-2, “Software Revenue Recognition.” Accordingly, revenue is recognized when all of the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is both fixed and determinable and (4) collectibility is reasonably assured. Generally, the Company recognizes revenues based on their respective fair values on product sales at the time of shipment. The Company accrues a provision for estimated returns concurrent with revenue recognition and classifies certain sales rebates and incentives to its dealers and distributors as a reduction of revenue. The Company records estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, promotions, distributor price protection and other volume-based incentives.

ADVERTISING COSTS

Costs related to advertising are expensed as incurred. Advertising expense was $0.4 million, $0.6 million and $0.8 million in 2004, 2003 and 2002, respectively.

ACCOUNTING FOR STOCK-BASED COMPENSATION

Comdial accounts for stock-based compensation using the intrinsic value method under Accounting Principles

32

Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. In 2004, the Company recorded stock compensation expense of approximately $24,000. The following table illustrates the effect on net (loss) income if the Company had applied the fair value recognition provisions of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148 (“SFAS 148”), “Transition and Disclosure, an Amendment of SFAS 123”, to stock-based employee compensation, expensed on a straight-line basis:

In thousands except per share amounts	2004			2003			2002
Net (loss) income: As reported	$	(7,678	)	$	(6,091	)	$	6,486
Add: Stock-based employee compensation expense included in net (loss) income, net of related tax effects		24			26			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,965	)		(771	)		(614	)
Net (loss) income: Pro forma	$	(9,619	)	$	(6,836	)	$	5,872
Basic (loss) earnings per share:
As reported	$	(0.82	)	$	(0.70	)	$	3.23
Pro forma	$	(1.03	)	$	(0.78	)	$	2.93
Diluted (loss) earnings per share:
As reported	$	(0.82	)	$	(0.70	)	$	2.79
Pro forma	$	(1.03	)	$	(0.78	)	$	2.53

INCOME TAXES

Comdial uses the liability method of accounting for income taxes, which is based on the differences between the financial statement and tax basis of assets and liabilities multiplied by the enacted tax rates that are known to be in effect when the differences reverse. The measurement of deferred tax assets is impacted by the amount of any tax benefits where, based on available evidence, the likelihood of realization can be established. Comdial has incurred cumulative operating losses for the last three years for financial statement and tax reporting purposes and has adjusted its valuation allowance account to equal the net deferred tax assets. Tax credits, if any, will be utilized to reduce current and future income tax expense and payments.

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 December 31, 2004 and 2003, 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.

Due to the three-year cumulative basis losses, the Company recorded a valuation allowance equal to its net deferred tax assets of $44.7 and $41.5 million as of December 31, 2004 and 2003, respectively. For the years ended December 31, 2004, 2003 and 2002, the Company recorded an increase (decrease) of its valuation allowance of $3.2 million, $(0.4) million and $(0.5) million, respectively. Approximately $3.6 million of the valuation allowance relates to tax benefits from a pension obligation that will be credited to other comprehensive income when realized.

At December 31, 2004, Comdial had net operating loss and credit carryovers of approximately $71.4 million and $1.4 million respectively, expiring beginning in 2005 through the year 2024. However, the Company experienced a change in control in 2002. As a result, pursuant to the provisions of the Internal Revenue Code (“IRC”) §382 the Company is subject to limitations on annual net operating loss deductions. As such, a significant portion of the net operating losses and tax credits are expected to expire prior to utilization.

(LOSS) INCOME PER COMMON SHARE

Basic (loss) income per common share is computed by dividing (loss) income applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted (loss) income per common share is computed by dividing (loss) income applicable to common stockholders by the weighted average number of common shares and potentially dilutive common equivalents outstanding during the period.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these assets and liabilities. The Company has evaluated the carrying value of its debt at December 31, 2004 and 2003, and believes it approximates fair value.

OTHER COMPREHENSIVE LOSS

Other comprehensive loss is recorded directly to a separate section of stockholders’ (deficit) equity in accumulated other comprehensive loss and includes unrealized gains and losses excluded from the consolidated statements of operations. These unrealized gains and losses consist of adjustments to the minimum pension liability. The minimum pension liability adjustment represents the excess of the additional pension liability over the fair value of plan assets.

33

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 use 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 at December 31, 2004 and 2003:

December 31, In thousands	2004			2003
Warranty liability at beginning of year	$	577		$	800
Repair costs paid during current year		(264	)		(401	)
Reductions for changes in accruals for warranties issued in prior year		(121	)		(399	)
Additions for warranties issued during current year		434			577
Warranty liability at December 31,	$	626		$	577

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs.” The statement amends Accounting Research Bulletin (“ARB”) No. 43, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. ARB No. 43 previously stated that these costs must be “so abnormal as to require treatment as current-period charges.” SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for fiscal years beginning after the issue date of the statement. The adoption of SFAS No. 151 is not expected to have any significant impact on the Company’s financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 29.” APB Opinion No. 29, “Accounting For Nonmonetary Transactions,” is based on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception of nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. The adoption of SFAS No. 153 is not expected to have any impact on the Company’s financial condition or results of operations.

In December 2004, the FASB revised its SFAS No. 123 (“SFAS No. 123R”), “Accounting for Stock Based Compensation.” The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be recognized over the period during which the employee is required to provide service in exchange for the award. The provisions of the revised statement are effective for financial statements issued for the first interim or annual reporting period beginning in 2006, with early adoption encouraged. The Company is currently evaluating the methodology for adoption on the impending effective date. Since the Company continues to issue options to employees and directors, management does expect this standard to have an impact on the Company’s financial condition and results of operations.

NOTE 2. FINANCINGS

2004 Bridge Financing

On March 12, 2004, the Company completed a bridge financing transaction involving the private placement of 90 units at a price of $0.1 million per unit resulting in gross proceeds to the Company of $9.0 million (the “2004 Bridge Financing”) and net proceeds of $8.2 million. Each unit includes a warrant to purchase 20,000 shares of the Company’s voting common stock at an exercise price of $3.38 per share at any time until February 17, 2007 (the “2004 Bridge Warrants”) and a $0.1 million subordinated convertible note which requires interest-only payments quarterly at the annual rate of 8% (the “2004 Bridge Notes”). The 2004 Bridge Notes have an aggregate face value of $9.0 million. Commonwealth Associates, L.P. (“Commonwealth”) served as placement agent for the 2004 Bridge Financing in exchange for the payment of certain of its expenses and a cash fee equal to 7.5% of the gross proceeds of the transaction, or $0.7 million.

The 2004 Bridge Notes are subordinate to the senior subordinated secured convertible notes that were issued by the Company pursuant to the private placement the Company consummated in September and October 2002 for

34

gross proceeds of $13.3 million (the “Placement Notes”) and the private placement the Company consummated with WinfieldCapital Corp. in 2002 of $2.0 million (the “Winfield Note”) and to any senior credit facility or other secured obligations the Company enters into with a bank, insurance company, finance company or other institutional lender, including the credit facility the Company obtained in April 2004.

The holders of the 2004 Bridge Notes have the right to convert the 2004 Bridge Notes into common stock at the conversion price of $2.50 per share at any time prior to the maturity of the notes, in whole or in part. The Company may convert the 2004 Bridge Notes into common stock at $2.50 per share if (i) the average closing price of the common stock equals or exceeds $5.00 per share for 20 consecutive trading days, (ii) the average daily trading volume during such 20 days is at least 50,000 shares, (iii) the common stock is then trading on a national stock exchange such as the Nasdaq National Market or the Nasdaq SmallCap Market, (iv) the shares into which the Bridge Notes would be converted are registered with the Securities and Exchange Commission (“SEC”) or are exempt from registration pursuant to SEC Rule 144(k), and (v) the shares are not subject to any contractual restrictions on trading, such as a lock-up agreement with an underwriter. The 2004 Bridge Notes mature on the earlier of (i) the later of September 27, 2005 or the maturity of the 2002 Placement notes or (ii) the occurrence of certain events. However, due to the Company’s failure to make interest payments on the 2004 Bridge notes in the first quarter of 2005 which constitutes an event of default, the note holders, at their election, may require that the full amount of the principal and accrued interest be paid immediately. Consequently, the liability has been classified as current in the consolidated balance sheet as of December 31, 2004.

The 2004 Bridge Warrants are exercisable by the holder at any time until February 17, 2007 at an exercise price of $3.38 per share, either by paying such amount in cash to the Company or on a cashless exchange basis. The Company can redeem the 2004 Bridge Warrants by paying the holder $0.01 per share upon five business days notice, if: (a) the closing price of the common stock is at least $6.76 for 20 consecutive trading days; (b) the common stock is trading on the Nasdaq Small Cap, Nasdaq National Market or another national securities exchange; (c) the average daily trading volume during such 20 day period equals or exceeds 50,000 shares; and (d) the shares issuable upon exercise of the 2004 Bridge Warrants are covered under an effective registration statement or are otherwise exempt from registration.

The proceeds from the 2004 Bridge Financing were allocated to the securities sold in the 2004 Bridge Financing on a relative fair value basis. The Company further discounted the remaining proceeds associated with the 2004 Bridge Notes with an allocation to a beneficial conversion option embedded in the notes. The Company will amortize the aggregate discounts of $9.0 million on the 2004 Bridge Notes to interest expense over the term of the notes using an effective interest rate of 52%. Amortization of debt discount and deferred finance costs associated with the 2004 Bridge Notes amounted to $0.2 million during the year ended December 31, 2004. Amortization of debt discount and deferred financing costs during the years ended December 31, 2005 and 2006 are estimated to be $0.1 million and $9.7 million, respectively.

2002 Bridge Financing

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 $0.15 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 $0.15 per share. The Company issued an aggregate of 3,554,667 shares pursuant to such conversions.

2002 Private Placement

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 4.2 million shares of the Company’s common stock at an exercise price of $0.15 per share (the “Placement Warrants”) at any time through September 27, 2004. 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 258,333 Placement Warrants. The principal amount of the Placement Notes is payable on the maturity date. Interest is payable quarterly in arrears.

In connection with the 2004 Bridge Financing, the Company entered into an amendment to the Placement Notes that extends the maturity of the notes by one year to September 27, 2006, and gives the holders conversion rights. Such conversion shall be at a conversion price of $5.00 per share exercisable at any time prior to maturity; except that, the conversion price was $3.38 for a period commencing 20 calendar days after the filing of an Information Statement pursuant to Regulation 14C of the Securities Exchange Act of 1934 and

35

ending on the later of (i) March 31, 2004, or (ii) five business days after shareholder approval of the 2004 Bridge Financing became effective in accordance with Regulation 14C. In addition, 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 $10.00 for 20 consecutive trading days. The initial conversion price of the Placement Notes is $4.95 per share. The conversion price of the Placement Notes is subject to downward adjustment in the event of certain defaults. The amendment also grants certain registration rights to the holders of the Placement Notes. In the first quarter of 2005, the Company failed to make interest payments on the 2002 Private Placement notes. As a result of this event of default, the note holders, at their election, may require that the full amount of the principal and accrued interest be paid immediately. Consequently, the liability has been classified as current in the consolidated balance sheet as of December 31, 2004.

2002 Private Placement - Winfield

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 the Winfield Note and warrants to purchase 0.4 million shares of common stock at an exercise price of $0.15 per share (the “Winfield Warrants”) at any time through September 27, 2004. The Winfield Note is due on September 27, 2005 and provide for quarterly interest-only payments with the entire principal due upon maturity. However, due to the Company’s failure to make interest payments on the Winfield Note in the first quarter of 2005, which constitutes an event of default, the note holder, at its election, may require that the full amount of the principal and accrued interest be paid immediately. Consequently, the liability has been classified as current in the consolidated balance sheet as of December 31, 2004.

The Winfield Note 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 $15.00 for 20 consecutive trading days. The initial conversion price of the Winfield Note is $4.95 per share. The conversion price of the Winfield Note is subject to downward adjustment in the event of certain defaults. The Winfield Note is senior in right of payment and security to the Placement Notes.

The Winfield Note contains a provision under which the Company is required to prepay a portion of the Note equal to 50% of the amount raised in excess of $5 million from any subsequent financing transaction. In the second quarter of 2004, the Company entered into an amendment to the Winfield Note (the “Amendment”) that changed the maturity date to March 27, 2006 and changed the Company’s option to extend the maturity date of the notes to up to six months (versus up to one year under the original note agreement). This amendment resulted in no gain or loss being recognized at the time of the amendment. The amendment also included a waiver of the mandatory prepayment provision in the original note, solely with respect to the 2004 Bridge Financing.

The Winfield Note is senior in right of payment and security to the Placement Notes and the 2004 Bridge Notes. While the Winfield Note is outstanding, the Company is restricted from declaring or paying any dividends or distributions on its outstanding common stock.

2002 Advisory Agreement

On June 7, 2002, Comdial entered into an advisory agreement with 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 16,667 shares of Comdial’s common stock upon signing of the agreement (the “Advisory Shares”) and warrants (the “Advisory Warrants”) to purchase 150,485 shares of common stock (representing 5% of our then outstanding fully-diluted capital stock) with an exercise price of $0.15 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 76,462 because Comdial received additional proceeds of $1,750,000 from the Bridge Financing during the third quarter of 2002. 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. 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 454,727 shares of common stock at an exercise price of $0.15 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, approximately $44,000 in expenses, and additional Advisory Warrants to acquire 25,833 shares of common stock at an exercise price of $0.15 per share. Two representatives of Commonwealth now serve on the Board of Directors of the Company.

2002 Senior Debt Restructuring

In June 2002, 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

36

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 $0.5 million, which was expensed immediately as a reduction of the gain on senior debt restructurings. 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).

NOTE 3. DEBT AND OTHER LIABILITY RESTRUCTURINGS

During 2002 and 2004, the Company expended significant efforts to restructure its various liabilities resulting in gains as summarized below:

December 31, In millions	2004		2003	2002
2002 Gain on senior debt restructurings		—	—	$	14.9
2002 Gain on other liability restructurings		—	—		3.8
2002 Gain on lease renegotiation		—	—		2.8
2004 Gain on lease renegotiation	$	0.6	—		—
Total gain on restructurings	$	0.6	—	$	21.5

Gain on 2002 Senior Debt Restructurings

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 million shares of the Preferred Stock to Bank of America. 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.

In June 2002, 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 buy-out of Bank of America resulted in a net gain of approximately $5.9 million.

Gain on 2002 Other Liability Restructurings

In 2002, the Company reached agreements with certain vendors and other creditors to forgive certain 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 $2.0 million were recognized during 2002.

In addition, 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.

During 2002, the Company terminated certain health care and life insurance benefits for retired employees and recognized a gain of $0.7 million.

Included in the non-bank obligations reduction in 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 $2.1 million of 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 December 31, 2004, the Company had sufficient purchase orders in process to meet its minimum commitment and had purchased $1.3 million of the specified products from the supplier.

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 December 31, 2002, the Company had fulfilled the commitment.

37

Gain on 2002 Lease Renegotiation

On March 21, 2002, the Company and Relational Funding Corporation and its assignees (collectively “RFC”) reached agreement to reduce the total payments due under the operating and capital leases from a combined balance of approximately $5.5 million to a payout schedule over 72 months totaling approximately $2.3 million. For the first 30 months, the monthly payment is $39,621, which then reduces to $25,282. 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. In addition, Comdial agreed to provide warrants to RFC to purchase 11,667 shares of the common stock of the Company for $9.15 per share, which warrants have an estimated fair market value of approximately $0.1 million and an expiration date of 2012.

Gain on 2004 Lease Renegotiation

On March 30, 2004, the Company and RFC reached agreement to further reduce the total payments due under the leases from a combined balance of approximately $1.2 million to a payout schedule over 12 months totaling approximately $0.5 million. For the first 11 months, the monthly payment is $40,000, with a final payment of $90,000, which includes $50,000 representing the purchase price of the equipment. Based on the new agreement, the Company recognized a gain on lease restructuring of $0.6 million during the first quarter of 2004.

NOTE 4. ACQUISITIONS & DISPOSALS

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 leased 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 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 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 was deferred due to the leaseback and was amortized over three years, the term of the lease, as a reduction of rent expense. For the years ended December 31, 2004, 2003 and 2002, the Company amortized $0.0 million, $0.5 million and $0.7 million, respectively, as a reduction of rent expense. As of December 31, 2004, the deferred gain has been fully amortized.

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, Comdial 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 and the Company and ePHONE agreed to terminate the royalty agreement; therefore, the entire deferred gain of $1.3 million was recognized and is included as gain from arbitration award in the accompanying consolidated statements of operations for 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. During November 2002, ePHONE made the $1.6 million payment under the settlement, which is included in gain from arbitration award in the accompanying consolidated statements of operations for 2002.

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 operations of CAC have been included in the accompanying statements of operations since the acquisition date.

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.

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

38

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 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 sheets.

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 5. INVENTORIES

Inventory, net of allowances, consists of the following:

December 31, In thousands	2004		2003
Finished Goods	$	3,695	$	4,651
Materials and supplies		139		319
Total	$	3,834	$	4,970

Comdial records provisions for product obsolescence, which reduce gross margin. During 2003, the Company recorded a provision for obsolescence and valuation of $1.8 million mostly due to lower than anticipated demand for discontinued and refurbished products, which the Company had expected to sell during 2003. During 2002, the Company recorded a provision for obsolescence and valuation of $0.9 million, mostly due to discontinued products.

Allowances for inventory obsolescence amounted to $1.3 million and $2.3 million as of December 31, 2004 and 2003, respectively. Changes in reserves will be dependent on management’s estimates of the recoverability of costs from inventory. As of December 31, 2004, the Company purchases substantially all of its finished goods from four outsource manufacturers.

NOTE 6. PROPERTY AND EQUIPMENT

Property and equipment, net of impairment charges and accumulated depreciation, consists of the following:

December 31, In thousands	2004			2003
Buildings and leasehold improvements	$	438		$	432
Machinery and equipment		5,399			5,302
Computer hardware equipment and tooling		5,625			5,372
Computer software for internal use		2,992			2,992
Less accumulated depreciation		(12,645	)		(11,315	)
Property and equipment - net	$	1,809		$	2,783

Depreciation expense charged to operations for the years 2004, 2003 and 2002, was $1.5 million, $1.7 million and $2.2 million, respectively.

Due to the Company’s decision in 2001 to outsource the majority of its manufacturing operations, management determined through an impairment analysis that certain of its fixed assets associated with manufacturing were impaired. Accordingly, the Company recognized impairment losses on its property and equipment of $0, $0 million and $0.2 million in fiscal 2004, 2003 and 2002, respectively.

39

NOTE 7. COMMITMENTS

Operating Lease Obligations

Comdial has various operating lease obligations relating to office and warehouse space and office equipment. Future aggregate minimum rental commitments under operating lease agreements that have initial non-cancelable lease terms in excess of one year are as follows as of December 31, 2004:

Year Ending December 31, In thousands	Operating Leases
2005	$	941
2006		977
2007		1,013
2008		1,049
2009		1,086
Thereafter		90
Total minimum lease commitments	$	5,156

The lease for the Company’s corporate headquarters includes minimum escalation clauses. The escalating payment requirements are included in the above schedule. The rent expense is recorded on a straight-line basis over the term of the lease. Total rent expense for operating leases, including rentals which are cancelable on short-term notice, for the years ended December 31, 2004, 2003 and 2002, was $1.2 million, $0.8 million and $0.9 million, respectively.

Inventory Purchase Obligations

The Company outsources substantially all of its manufacturing requirements. As of December 31, 2004, the Company had outstanding purchase obligations of approximately $9.4 million with its outsourcing contractors that could not be canceled without significant penalties. In addition, the Company’s outsourcing contractors acquire fabricated parts from various suppliers.

NOTE 8. DEBT IN DEFAULT AND OTHER LONG-TERM DEBT

Long-term debt in default and other long-term debt consists of the following:

In thousands	December 31, 2004			December 31, 2003
Capital leases (See Note 3)	$	141		$	1,299
2004 Bridge Notes, in default at December 31, 2004, net of discounts of $8,999 and $0, respectively (See Note 2)(a),(e)		1			—
2002 Private Placement Notes, in default at December 31, 2004, net of discounts of $1,586 and $2,358, respectively (b),(e)		11,731			11,166
2002 Private Placement Winfield Note, in default at December 31, 2004, net of discounts of $89 and $160, respectively (c),(e)		1,911			1,633
Credit facility, in default (d)		2,326			—
Total debt, net of discounts of $10,674 and $2,518, respectively		16,110			14,098
Less current maturities on debt		(16,101	)		(389	)
Total long-term debt	$	9		$	13,709

(a) As of December 31, 2004, Comvest, Shea Ventures, LLC, PS Capital LLC, Robert Priddy and Neil P. Lichtman, our CEO, all of which are related parties, hold a total of $3.5 million face value of the 2004 Bridge Notes and 2004 Bridge Warrants to purchase 0.7 million shares of common stock.

See additional terms and information in Note 2. Due to the Company’s failure to make interest payments on the 2004 Bridge Notes in the first quarter of 2005, which constitutes an event of default, the note holders, at their election, may require that the full amount of the principal and accrued interest be paid immediately. Consequently, the liability has been classified as current in the consolidated balance sheet as of December 31, 2004.

(b) On September 27, 2002 and October 29, 2002, the Company consummated two closings of approximately $12.6 million and $0.7 million, respectively, for a total of $13.3 million under the Private Placement. This includes the conversion of the remaining Bridge Notes of approximately $3.5 million. The Private Placement consisted of the Placement Notes, 7% subordinated secured convertible promissory notes, and the Placement Warrants to purchase an aggregate of approximately 4.5 million shares of the Company’s common stock at an exercise price of $0.15 per share at any time through September 27, 2004. The Placement Warrants, which were valued at $4.1 million using the Black Scholes method, have been recorded as discount on the Placement Notes and are being accreted over the term of the debt, using the effective interest method, and this accretion is included in interest expense. As of December 31, 2004, $2.5 million of the discount on the Placement Notes has been accreted.

In connection with the 2004 Bridge Financing (Note 2), the Company entered into an amendment to the Placement Notes that extended the maturity of the notes by one year to September 27, 2006. In the first quarter of 2005, the Company failed to make interest payments on the 2002 Placement Notes. As a result of this default, the note holders, at their election, may require that the full amount of the principal and accrued interest be paid immediately. Consequently, the liability has been classified as current in the consolidated balance sheet as of December 31, 2004. In addition, 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 $10.00 per share for 20 consecutive trading days. The initial conversion price of the Placement Notes is $4.95 per share. The conversion price of the Placement Notes is subject to downward adjustment in the event of certain defaults. The amendment also grants certain registration rights to the holders of the Placement Notes.

40

The entire principal amount of the Placement Notes is payable on the maturity date. The Placement Notes contain a provision under which the Company is required to prepay a portion of the notes equal to 50% of the amounts raised in excess of $5 million from any subsequent financing transaction. Any such repayment is subordinated in right of payment to the prior payment in full of the principal and interest of the Winfield Note and therefore, the Placement Notes were shown as long-term debt at March 31, 2004. In the second quarter of 2004, the Company obtained a waiver of the prepayment provision under the Placement Notes solely with respect to the 2004 Bridge Financing. Interest at 7% is payable quarterly in arrears. The Placement Notes are secured by a second lien (subordinated to the first lien of Winfield Capital Corp. described in (c) below) on substantially all of the Company’s assets. While the notes are outstanding, the Company is restricted from declaring or paying any dividends or distributions on its outstanding common stock.

As of December 31, 2004, Comvest, Shea Ventures, LLC, Nickolas Branica, the Company’s former chief executive officer and Robert Priddy, which are related parties, hold a total of $8.9 million face value of the Placement Notes.

In the first quarter of 2005, the Company failed to make interest payments on the 2002 Placement Notes. As a result of this event of default, the note holders, at their election, may require that the full amount of the principal and accrued interest be paid immediately. Consequently, the liability has been classified as current in the consolidated balance sheet as of December 31, 2004.

(c) On September 27, 2002, the Company consummated a private placement with Winfield Capital Corp. of $2.0 million. The Winfield Transaction consisted of the 12% Winfield Note and the Winfield Warrants to purchase 0.4 million shares of common stock at an exercise price of $0.15 per share at any time through September 27, 2004. The Winfield Warrants, which were valued at $0.3 million using the Black Scholes method, have been recorded as discount on the Winfield Note and are being accreted over the term of the debt, using the effective interest method, and this accretion is included in interest expense. As of December 31, 2004, $0.2 million of the discount on the Winfield Note has been accreted.

The Winfield Note 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 $15.00 per share for 20 consecutive trading days. The initial conversion price of the Winfield Note is $4.95 per share. The conversion price of the Winfield Note is subject to downward adjustment in the event of certain defaults.

The Winfield Note contains a provision under which the Company is required to prepay a portion of the Notes equal to 50% of the amount raised in excess of $5 million from any subsequent financing transaction. Accordingly, as of March 31, 2004, $1.7 million of the Winfield Note’s outstanding principal balance was recorded as current maturities of long-term debt. In the second quarter of 2004, the Company entered into the Amendment to the Winfield Note that changed the maturity date to March 27, 2006 and changed the Company’s option to extend the maturity date of the notes to up to six months (versus up to one year under the original note agreement). This amendment resulted in no gain or loss being recognized at the time of the Amendment. The Amendment also included a waiver of the mandatory prepayment provision in the original note, solely with respect to the 2004 Bridge Financing. Accordingly, the outstanding principal balance was recorded in full as long-term debt as of June 30, 2004. In the first quarter of 2005, the Company failed to make the quarterly interest payments due on the Winfield Note. As a result of this default, the note holders, at their election, may require that the full amount of the principal and accrued interest be paid immediately. Consequently, the liability has been classified as current in the consolidated balance sheet as of December 31, 2004.

The principal amount of the Winfield Note is payable on the maturity date. Interest at 12% is payable quarterly in arrears. The Winfield Note is senior in right of payment and security to the Placement Notes and the 2004 Bridge Notes. While the Winfield Note is outstanding, the Company is restricted from declaring or paying any dividends or distributions on its outstanding common stock.

(d) On April 29, 2004, the Company executed a loan and security agreement (the “Credit Facility”) with Silicon Valley Bank, which allows for borrowing against certain of the Company’s accounts receivable up to a maximum of $2.5 million. Loans against the line bear interest at a rate equal to the prime rate plus three (3) percentage points per annum and are secured by all of the Company’s assets. Additional terms include a $1,000 per month collateral monitoring fee and an unused line fee in an amount equal to 0.375% per annum of the average daily unused and undisbursed portion. A termination fee applies if the Company terminates the Credit Facility within twelve (12) months. All present and future debt of the Company is subordinate to the outstanding obligations related to this facility. The Credit Facility matures on October 29, 2005 and contains a financial covenant related to net worth. As of December 31, 2004, the outstanding borrowings under the Credit Facility totaled $2.3 million. During the first quarter of 2005, the Company was not able to comply with the financial covenant associated with the Credit Facility and is working with the Bank to determine alternatives related to the credit facility. As a result of the default, the Bank may cease making loans and could accelerate and declare all amounts due, which was $2.3 million as of December 31, 2004. The Bank agreed to forbear from exercising its rights and remedies as a result of the default through March 31, 2005.

(e) As noted above, the Company did not make its quarterly interest payments due on March 31, 2005 on its

41

2002 Placement Notes, 2002 Winfield Note, and the 2004 Bridge Notes, which had an aggregate carrying value of $13.6 million as of December 31, 2004, and is net of aggregate discounts of $10.7 million. While the note holders have not indicated their intention to require immediate payment of all or any portion of the outstanding principal and accrued interest, they have the right to do so. In the event that any acceleration of payment is required, the discounts associated with these notes would also accelerate resulting in an immediate charge to interest expense for the respective unamortized discount associated with the accelerated amount.

Long-term debt maturities under the original terms, including future minimum lease commitments for capitalized leases, are as follows:

Year Ending December 31, In thousands	Capital Leases		Other Long-Term Debt		Total
2005	$	132	$	2,326	$	2,458
2006		3		24,317		24,320
2007		2		0		2
2008		2		0		2
2009		2		0		2
Thereafter		0		0		0
Total minimum commitments	$	141	$	26,643	$	26,784

Assets recorded under capital leases (included in property and equipment in the accompanying consolidated balance sheets) are as follows:

December 31, In thousands	2004			2003
Capital leases	$	1,505		$	1,336
Less accumulated amortization		(1,369	)		(880	)
Capital leases - net	$	136		$	456

Amortization of assets recorded under capital leases is included in depreciation expense.

NOTE 9. INCOME TAXES

The Company did not generate taxable income during the years ended December 31, 2004, 2003 and 2002, and, therefore, did not record any income tax provision for those periods.

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

In thousands	2004			2003			2002
Federal tax (benefit) at statutory rate(34% in 2004, 2003 and 2002)	$	(2,611	)	$	(2,071	)	$	2,205
State income (benefit) tax net of federal tax		(281	)		(220	)		257
Nondeductible charges		(343	)		21			179
Adjustment to valuation allowance		3,235			2,270			(2,641	)
Income tax provision	$	—		$	—		$	—

The components of the net deferred tax assets at December 31, 2004 and 2003 are as follows:

Deferred Assets (Liabilities) In thousands	2004			2003
Net loss carryforwards	$	26,657		$	23,013
Tax credit carryforwards		1,411			1,411
Inventory		596			1,020
Pension reserve		3,635			3,179
Compensation and benefits		674			629
Capitalized software development costs		2,707			2,379
Other deferred tax assets		429			337
Goodwill		1,481			1,916
Research and development expenditures		5,081			5,708
Allowance for bad debts		87			100
Deferred financing costs		1,600			1,545
Fixed asset depreciation		404			290
Total deferred tax assets		44,762			41,527
Total deferred tax liabilities		—			—
Net deferred tax assets		44,762			41,527
Less: Valuation allowance		(44,762	)		(41,527	)
Total	$	—		$	—

Comdial periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. Due to the three-year cumulative basis losses, the Company recorded a valuation allowance equal to its net deferred tax assets of $44.7 and $41.5 million for the years ended December 31, 2004 and 2003, respectively. For the years ended December 31, 2004, 2003 and 2002, the Company recorded an increase (decrease) of its valuation allowance of $3.2 million, $(0.4) million and $(0.5) million, respectively. Approximately $3.6 million of the valuation allowance shown above relates to tax benefits from a pension obligation that will be credited to other comprehensive income when realized.

42

At December 31, 2004 Comdial had net operating loss and credit carryovers of approximately $71.4 million and $1.4 million respectively, expiring beginning in 2005 through the year 2024. However, the Company experienced a change in control in 2002, pursuant to the provisions of Internal Revenue Code §382 and is subject to limitations on annual net operating loss deductions. As such, a significant portion of the net operating losses and tax credits are expected to expire prior to utilization.

NOTE 10. (LOSS) INCOME PER COMMON SHARE

Basic (loss) income per common share is computed by dividing (loss) income applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted (loss) income per common share is computed by dividing (loss) income applicable to common stockholders by the weighted average number of common shares and potentially dilutive common equivalents outstanding during the period.

Unexercised options to purchase 2,801,435, 1,930,034, 215,768 shares of common stock and warrants to purchase 1,817,708, 905,510 and 11,667 shares of common stock for the years ended December 31, 2004, 2003 and 2002, respectively, were not included in the computations of diluted loss per share because assumed exercise, using the treasury-stock method, would be anti-dilutive.

The following table discloses the (loss) income per share information for the years ended December 31, 2004, 2003 and 2002.

In thousands, except per share data	2004			2003			2002
Basic:
Net (loss) income	$	(7,678	)	$	(6,091	)	$	6,486
Preferred stock dividend		—			—			(284	)
Gain on redemption of preferred stock		—			—			1,000
(Loss) income applicable to common stockholders	$	(7,678	)	$	(6,091	)	$	7,202
Weighted average number of common shares outstanding during the period		9,324			8,757			2,005
Dilutive securities		—			—			1
Weighted average number of shares used in calculation of basic (loss) income per common share		9,324			8,757			2,006
(Loss) earnings per share before preferred stock dividend	$	(0.82	)	$	(0.70	)	$	3.23
Preferred stock dividend		—			—			(0.14	)
Gain on redemption of preferred stock		—			—			0.50
(Loss) earnings per share applicable to common stock	$	(0.82	)	$	(0.70	)	$	3.59
Diluted:
Net (loss) income	$	(7,678	)	$	(6,091	)	$	6,486
Preferred stock dividend		—			—			(284	)
Gain on redemption of preferred stock		—			—			1,000
(Loss) income applicable to common stockholders	$	(7,678	)	$	(6,091	)	$	7,202
Weighted average number of common shares outstanding during the period		9,324			8,757			2,006
Effect of dilutive stock options		—			—			57
Effect of dilutive warrants		—			—			262
Weighted average number of shares used in calculation of diluted (loss) income per common share		9,324			8,757			2,325
(Loss) income per share before preferred stock dividend	$	(0.82	)	$	(0.70	)	$	2.79
Preferred stock dividend		—			—			(0.12	)
Gain on redemption of preferred stock		—			—			0.43
(Loss) earnings per common share	$	(0.82	)	$	(0.70	)	$	3.10

During the years ended December 31, 2004, 2003 and 2002, 19,200, 0 and 0 options were exercised at a weighted average exercise price of $0.98, $0, and $0, respectively. During the years ended December 31, 2004, 2003 and 2002, 887,802, 209,941 and 4,509,368 warrants were exercised at a weighted average exercise price of $0.15, $0.15 and $0.15, respectively.

NOTE 11. PENSION AND SAVINGS PLANS

As of December 31, 2004, Comdial has one qualified pension plan that provides benefits based on years of service and an employee’s compensation during the employment period. This plan is a qualified plan for all employees of Comdial. Comdial had a second pension plan that was terminated during 2002; this was a non-qualified plan (“Retirement Benefit Restoration Plan”). The non-qualified plan was strictly for executive officers and/or highly compensated employees who are designated as a participant of the plan by the Compensation Committee of Comdial. The non-qualified plan was not funded.

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

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

43

During 2002, the Company reached separate agreements (the “Agreements”) with the three former executives of the Company who still had vested benefits under the Retirement Benefit Restoration 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 Retirement Benefit Restoration Plan, thus the Company terminated the Retirement Benefit Restoration Plan and recognized a gain of $1.1 million, which is included as gain on other liability restructurings in the accompanying consolidated statements of operations for the year ended December 31, 2002.

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 full amount of these losses was reimbursed by the Company’s insurance carrier in October 2003.

The following table sets forth the change in projected benefit obligations of the pension plans during 2004 and 2003. The measurement date for the Company’s pension accounting is December 31.

In thousands	2004			2003
Benefit obligation at beginning of year	$	28,982		$	25,643
Interest cost		1,658			1,764
Actuarial loss		839			3,714
Disbursements		(2,653	)		(2,139	)
Benefit obligation at end of year	$	28,826		$	28,982

The following table sets forth the change in plan assets of the pension plans and amounts recognized in Comdial’s consolidated balance sheets at December 31, 2004 and 2003.

In thousands	2004			2003
Fair value of plan assets at beginning of year	$	22,517		$	19,939
Actual return on plan assets		1,029			4,717
Disbursements		(2,653	)		(2,139	)
Fair value of plan assets at end of year	$	20,893		$	22,517
Funded status	$	(7,933	)	$	(6,465	)
Unrecognized actuarial loss		9,652			8,441
Net amount recognized	$	1,719		$	1,976
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost	$	1,719		$	1,976
Accrued benefit cost		(9,652	)		(8,441	)
Accumulated other comprehensive loss		9,652			8,441
Net amount recognized	$	1,719		$	1,976

The following table sets forth the percentage of the fair value of total plan assets of the pension plan at December 31, 2004 and 2003 and the target asset allocation percentages:

In thousands	2004		2003		Target
Equity securities	61	%	79	%	65	%
Debt securities	39	%	21	%	35	%
Total	100	%	100	%	100	%

Subsequent to December 31, 2003 the asset allocation for the plan was adjusted to 65% equity securities and 35% debt securities.

Investment objectives for the Company’s plan assets are to:

• optimize the long-term return on plan assets at an acceptable level of risk;

• maintain a broad diversification across asset classes;

• maintain careful control of the risk level within each asset class; and

• focus on a long-term return objective.

Target asset allocations are intended to achieve a desired total asset return over the long term, with an acceptable level of risk in the shorter term. Selection of the targeted asset allocation for the plan assets was based upon a review of the expected return and risk characteristics of each asset class. Risk is measured in terms of likely volatility of annual investment returns, pension expense and funding requirements. External consultants conducted an asset and liability study in order to determine the most appropriate investment strategy and asset mix for our plan assets. To develop the expected long-term rate of return assumption on the plan assets, the consultants use long-term historical return information for the targeted asset mix identified in the asset and liability study. Adjustments are made to the expected long-term rate of return assumption when deemed necessary based upon revised expectations of future investment performance of the overall capital markets. The Company assumes prudent levels of risk to meet overall pension investment goals. Risk levels are managed through formal and written investment guidelines. Portfolio risk is managed by having well defined long-term strategic asset allocation targets.

44

Weighted average assumptions used to determine the benefit obligations for the plan as of December 31, 2004 and 2003, were as follows:

	2004		2003
Discount rate	6.00	%	6.00	%
Rate of compensation expense	N/A		N/A

For 2004, the Company’s discount rate of 6.0% approximated Moody’s Aa bond rate as of December 31, 2004.

The accumulated benefit obligation for the plan as of December 31, 2004 and 2003 was $28.9 million and $29.0 million, respectively.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plan:

In thousands
2005	$	2,351
2006		2,156
2007		2,006
2008		1,895
2009		1,718
2010-2014		7,779

Weighted average assumptions used to determine the net periodic pension cost for the plans as of December 31, 2004, 2003 and 2002, were as follows:

	2004		2003		2002
Discount rate	6.00	%	7.25	%	7.25	%
Expected long-term return on plan assets	9.00	%	9.00	%	9.00	%
Rate of compensation increase	N/A		N/A		N/A

Net periodic pension cost (benefit) for 2004, 2003 and 2002 included the following components:

In thousands	2004			2003			2002
Interest cost	$	1,658		$	1,764		$	1,699
Expected return on plan assets		(1,905	)		(1,676	)		(2,067	)
Recognized actuarial loss (gain)		504			473			(36	)
Termination gain		—			—			(1,123	)
Net periodic pension cost (benefit)	$	257		$	561		$	(1,527	)

On December 31, 2004 and 2003, the projected benefit obligations exceeded the market value of the plan assets (adjusted for accruals) by $9.7 million and $8.4 million, respectively. The amount recognized in other comprehensive loss during 2004 and 2003 arising from the increase in the additional minimum pension liability was $0.5 million and $0.2 million, respectively, net of tax benefits of $0 for both years. If the Company’s investment return and other actuarial assumptions remain unchanged, the Company will have to pay approximately $0.2 million during 2005 into the pension plan.

In addition to these pension benefits, Comdial may contribute to a 401(k) plan, based on employees’ contributions. Participants can contribute from 1% to 17% of their salary and Comdial may match contributions equal to 50% of the participant’s contribution up to the first 6%. Comdial’s total expense for the matching portion of the 401(k) plan for 2004, 2003 and 2002 was $0.0 million, $0.1 million and $0.2 million, respectively.

NOTE 12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Prior to the Company terminating the benefits in June 2002, Comdial provided certain health care coverage (until age 65), which was subsidized by the retiree through insurance premiums paid to Comdial, and life insurance benefits for substantially all of its retired employees. Upon terminating the benefits, the Company recorded a gain of $0.8 million, which was included in miscellaneous income in the accompanying consolidated statements of operations for 2002. The postretirement benefit obligation was not funded and did not include any provisions for securities, settlement, curtailment, or special termination benefits. In 1993, when SFAS No. 106 went into effect, Comdial elected to amortize the cumulative effect of this obligation over 20 years (see unrecognized transition obligation in the table below).

Net periodic postretirement benefit for 2002 included the following components:

In thousands	2002
Service cost	$	3
Interest cost		14
Amortization of unrecognized transition obligation		19
Recognized actuarial gain		(32	)
Termination gain		(750	)
Net postretirement benefit	$	(746	)

NOTE 13. STOCK-BASED COMPENSATION PLANS

The Comdial Corporation 2002 Employee and Non-employee Directors Stock Incentive Plan (the “2002 Plan”) was adopted by the Company’s Board of Directors and approved by the shareholders of the Company at a special meeting held August 26, 2002.

The 2002 Plan replaces the 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan

45

(together the “1992 Plans”), each of which expired according to their terms on March 5, 2002. However, the 1992 Plans will continue activity to the extent all options are either exercised or cancelled. The 2002 Plan and the 1992 Plans provide for stock options to purchase shares of common stock that may be granted to officers, directors and certain key employees as additional compensation. Pursuant to the terms of the 1992 Non-employee Directors Stock Incentive Plan (the “Directors Stock Incentive Plan”), each non-employee director shall be awarded 222 shares of Comdial’s common stock for each fiscal year Comdial reports income. In January 1997, in accordance with the terms of the Directors Stock Incentive Plan, the Board of Directors adopted a resolution suspending 56 of the 222 shares of Comdial’s common stock automatically awarded to non-employee directors under such circumstances. In 2004, 2003, and 2002, non-employee directors were awarded 0, 0, and 667 shares, respectively under the Directors Stock Incentive Plan. Previously, directors could elect to defer receipt of their shares; however, in 2002, the Company settled all unearned amounts due to former directors with agreed upon cash payments and recognized income of $112,000 related thereto.

The plans are composed of stock options, restricted stock, non-statutory stock, and incentive stock. Comdial’s incentive plans are administered by the Compensation Committee of Comdial’s Board of Directors.

In 2003, the Company amended the 2002 Plan to increase the number of shares available for issuance. As of December 31, 2004, there were 81,113 shares of Comdial’s common stock reserved for issuance under the 2002 Plan that was approved by the stockholders in 2002 and amended with stockholder approval in 2003 and with a majority shareholder consent in 2004.

Options granted in 2004, 2003 and 2002 under the 2002 Plan have a maximum term of ten years and vest in installments of 33.33% per year on each of the first through the third anniversaries of the grant date. Options granted in 2002 under the 1992 Plans have a maximum term of ten years and vest in installments of 50%, 25% and 25% per year on each of the first through the third anniversaries of the grant date. During 2002, the Company also issued 166,667 stock options with a 10 year term outside of the 1992 and 2002 plans to an employee/director (the “Director Plan”), with 40% of such options vesting immediately and 20% vesting on each of the first through the third anniversaries of the grant date. In 2003, 50,000 of the options granted under the Director Plan were cancelled upon the resignation of the employee/director as an employee. All options granted under the 2002, 1992 and director plans are granted at an exercise price equal to the market price of Comdial’s common stock on the grant date.

Information regarding stock options granted under the 2002, 1992, and director plans is summarized below:

	2004		(1)		2003		(1)		2002		(1)
Options outstanding
January 1;	1,930,034		$	2.38	1,212,501		$	4.16	68,133		$	44.38
Granted	1,045,132			2.39	922,397			1.82	1,149,880			2.01
Exercised	(31,775	)		0.98	0			0.00	0			0.00
Forfeited	(141,956	)		2.31	(204,864	)		1.83	(5,512	)		61.35
Options outstanding, December 31;	2,801,435		$	2.41	1,930,034		$	2.38	1,212,501		$	4.16
Options exercisable, December 31;	1,165,288		$	2.82	408,967		$	4.40	192,566		$	11.69
Per share ranges of options outstanding at December 31	$0.15 - $196.95				$0.15 - $196.95				$0.98 - $196.95
Dates through which options outstanding at December 31, were exercisable	1/2005-12/2014				1/2004-12/2013				1/2003-12/2012

(1) Weighted-average exercise price at grant date.

The following table summarizes information concerning currently outstanding and exercisable options at December 31, 2004:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at 12/31/04	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable at 12/31/04	Weighted Average Exercise Price
$ 0.15 to $20.25	2,780,955	8.6	$	2.08	1,144,585	$	2.03
$20.25 to $40.50	17,320	5.8		28.00	17,320		28.00
$40.50 to $81.00	0	0.0		0.00	0		0.00
$81.00 to $101.25	0	0.0		86.25	223		86.25
$101.25 to $121.50	868	3.4		113.84	868		113.84
$121.50 to $141.75	971	1.8		132.21	971		132.21
$141.75 to $162.00	0	0.0		0.00	0		0.00
$162.00 to $182.25	875	3.1		164.10	875		164.10
$182.25 to $196.95	446	3.3		196.95	446		196.95
	2,801,435	8.6	$	2.41	1,165,288	$	2.82

46

The fair value of each option grant was estimated on the date of grant using the Black Scholes option-pricing model with the following assumptions:

	2004	2003	2002
Risk-free interest rate	2.16%	1.27%	1.45%
Expected life	10.00	7.95	5.87
Expected volatility	156.7%	352.1%	375.1%
Expected dividends	None	None	None

NOTE 14. SEGMENT INFORMATION

During 2004, 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 segments internal financial reporting used for management purposes. Unallocated costs include operating expenses, goodwill amortization, interest expense, other miscellaneous expenses and income tax expense. Comdial does not maintain information that would allow assets, liabilities or unallocated costs to be broken down into the various product segments as most of these items are shared in nature.

The following tables show segment information for the years ended December 31:

In thousands	2004			2003			2002
Business segment net sales
Switching	$	31,449		$	37,464		$	36,892
Messaging		6,981			9,362			13,240
CTI & Other		1,153			1,115			1,589
Net sales	$	39,583		$	47,941		$	51,721
Business segment gross profit
Switching	$	10,996		$	12,284		$	12,077
Messaging		2,759			3,716			5,069
CTI & other		726			464			70
Gross profit		14,481			16,464			17,216
Operating expenses		20,361			19,294			27,286
Interest expense, net		2,500			3,279			7,803
(Gain) loss on sale of assets		(78	)		(3	)		350
Miscellaneous income - net		(624	)		(15	)		(24,709	)
(Loss) income before income taxes	$	(7,678	)	$	(6,091	)	$	6,486

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

In thousands	2004			2003			2002
Sales:
ALLTEL Supply, Inc.	$	7,006		$	8,560		$	9,982
Graybar Electric Company, Inc.		14,701			20,869			26,067
Sprint/North Supply, Inc.		9,203			11,614			10,326
Percentage of net sales:
ALLTEL Supply, Inc.		18	%		18	%		19	%
Graybar Electric Company, Inc.		37	%		44	%		50	%
Sprint/North Supply, Inc.		23	%		24	%		20	%
Net sales of all three:
Switching	$	28,230		$	33,376		$	35,103
Messaging		2,680			7,667			11,272
Net sales	$	30,910		$	41,043		$	46,375

NOTE 15. LITIGATION AND OTHER 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 claims 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 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 commenced 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.

47

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 Chapter 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 and defamation, and seeking compensatory, punitive and exemplary damages in the total amount of $1.9 million, plus interest. Among other things, Mr. Grover claimed 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. In pre-trial proceedings, the court dismissed all claims except for the tortious interference claim. On March 18, 2004, following a jury trial on that claim, the court granted Comdial’s motion to dismiss and the case was ended without jury deliberations. In late March 2004, Mr. Grover filed a motion for reconsideration, which was denied and Mr. Grover subsequently appealed this decision on July 30, 2004. In January 2005, the Virginia Supreme Count upheld the trial decision in favor of Comdial and denied Mr. Grover’s petition of appeal. It is unknown if Mr. Grover will file a motion for reconsideration. 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.

Chief Executive Officer Resignation

In March 2004, Nickolas A. Branica resigned and the Company announced that Neil P. Lichtman, Comdial’s president, will succeed Mr. Branica as chief executive officer. Pursuant to Mr. Branica’s employment agreement as amended, he will receive as severance an amount equal to twelve months of his annual base salary at the rate in effect on the date his employment terminated. In addition, all of Mr. Branica’s stock options were immediately vested. Mr. Branica will receive medical, life and other insurance benefits for a period of up to twelve months following his employment termination.

NOTE 16. RESTRUCTURING

In connection with the Company’s continued focus on improving cash flow from operations, the Company initiated a restructuring plan (the “Restructuring Plan”) during the first quarter of 2004. Pursuant to the Restructuring Plan, approximately 20 employees were notified as of March 15, 2004 that their positions would be eliminated. These employees received severance based on length of service with the Company and/or employment agreements, as applicable. Until March 2004, Nickolas A. Branica served as the Company’s CEO. In March 2004, Mr. Branica’s employment relationship with the Company terminated. Pursuant to Mr. Branica’s employment agreement as amended, he will receive as severance an amount equal to twelve months of his annual base salary at the rate in effect on the date his employment ended. Mr. Branica will receive medical, life and other insurance benefits for a period of up to twelve months following his employment separation. During 2004, the Company made cash severance payments of $0.2 million. As of December 31, 2004, the Company has remaining obligations of $0.1 million related to severance and related benefits. These amounts are included in restructuring expenses in the accompanying consolidated statement of operations for the year ended December 31, 2004.

In addition to his severance as outlined above, all of Mr. Branica’s stock options were immediately vested at the time of his termination. In connection with the modification of Mr. Branica’s stock option agreement, the Company recorded stock compensation expense of approximately $0.2 million for the year ended December 31, 2004. This amount is also included in restructuring expenses in the accompanying consolidated statement of operations for the year ended December 31, 2004.

NOTE 17. IMPAIRMENT OF LONG-LIVED ASSETS

During 2004, 2003 and 2002, Comdial recorded impairment losses on long-lived assets, including goodwill, of $0.2, $0 million and $1.0 million, respectively. Asset impairments for 2002 of $0.2 million were recorded related to the manufacturing equipment that was to be disposed as a result of the outsourcing of the Company’s manufacturing operations. The asset impairments were measured by the excess of the carrying value of the assets over the fair value of the assets. Fair value of the assets was determined by independent valuations and quoted market prices.

Other impairment losses consisted of capitalized software development costs in the amount of $0.0 million, $0.4 million and $0.7 million for 2004, 2003 and 2002, respectively, related to discontinued products. In 2002, $0.2 million of software purchased for internal use that was no longer going to be utilized due to the Company’s downsizing was written off. In 2004, $0.2 million of patent costs were written off, as the Company was no longer pursuing those patents.

48

NOTE 18. GOODWILL

In July 2001, the Financial Accounting Standards Board issued 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 annually, and any impairment charge resulting from the initial application of SFAS No. 142 would be classified as a cumulative change in accounting principle.

The Company adopted SFAS No. 142 and discontinued the amortization of goodwill effective January 1, 2002. In addition, the Company completed the transitional impairment test and determined that goodwill was not impaired.

NOTE 19. STOCKHOLDERS’ EQUITY

Reverse Stock Split

Effective November 26, 2002, the Company effectuated a reverse stock split at a ratio of one share for every fifteen shares of the Company’s common stock. As a part of the reverse stock split, the Company retired all treasury stock. All share and per share data have been adjusted to give retroactive effect to the reverse stock split. There was no effect on par value per share of $0.01.

Authorized Shares

On August 26, 2002, the Company obtained shareholder approval to increase the amount of authorized common stock under its Restated Certificate of Incorporation to 10 million. On December 6, 2002, the Board and the holders of a majority of the outstanding shares of common stock approved an adjustment in the Company’s authorized shares of common stock to 60 million in order to adjust the number of shares outstanding in light of the reverse stock split. Such adjustment became effective on December 26, 2002.

Preferred Stock

On March 6, 2002, Comdial and Bank of America entered into the First Amendment to the Amended and Restated Credit Agreement. 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 million shares of the Preferred Stock to Bank of America. In June 2002, 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 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 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. The Preferred Stock continues to be authorized with the same terms as prior to the payoff.

Warrants

In connection with the 2002 financings, the Company issued 5.6 million warrants in 2002 to purchase shares of the Company’s common stock at an exercise price of $0.15 per share. As of December 31, 2004, all of such warrants had been converted to shares of the Company’s common stock. In connection with the 2004 financings, the Company issued 1.8 million warrants in 2004 to purchase shares of the Company’s common stock at an exercise price of $3.38 per share. As of December 31, 2004, none of such warrants had been converted to shares of the Company’s common stock.

In 2002 and in connection with a performance based bonus, the Company issued 55,000 warrants to purchase shares of the common stock at an exercise price of $0.15 per share to Nickolas A. Branica, the Company’s chief executive officer until March 2004, and 45,000 warrants to purchase shares of the common stock at an exercise price of $0.15 per share to Paul Suijk, the Company’s chief financial officer until November 2002. Compensation expense of approximately $0.5 million was recorded. Mr. Branica exercised his warrants in 2002 and Mr. Suijk exercised his warrants in 2003.

As of December 31, 2004, the following warrants were outstanding:

	Warrants Outstanding	Warrants Exercisable	Exercise Price		Expiration Year
Advisory Warrants	6,041	6,041	$	0.15	2007
2004 Private Placement Warrants	1,800,000	1,800,000	$	3.38	2007
Lease Renegotiation Warrants	11,667	11,667	$	9.15	2012
Total	1,817,708	1,817,708

NOTE 20. RELATED PARTY TRANSACTIONS

On March 12, 2004, the Company closed a bridge financing transaction involving the private placement of 90 units at a price of $0.1 million per unit resulting in gross proceeds to the Company of $9.0 million. Each unit includes a warrant to purchase 20,000 shares of the Company’s voting common stock at an exercise price of $3.38 per share until February 17, 2007 and a $0.1 million subordinated convertible note which includes interest payable quarterly at the annual rate of 8%. Commonwealth served as placement agent for the 2004 Bridge Financing in exchange for the payment of certain of its expenses and a cash fee equal to 7.5% of the gross proceeds of the transaction.

49

Of the gross proceeds from the 2004 Bridge Financing, $3.5 million were received from Comvest, Shea Ventures, LLC, PS Capital LLC, Robert Priddy and Neil P. Lichtman, our CEO, all of which are related parties. In addition, the Company issued 2004 Bridge Warrants to purchase 0.5 million shares of common stock to those same related parties. All 2004 Bridge Warrants were outstanding as of December 31, 2004.

As a part of the September 27, 2002 Private Placement, Commonwealth, as placement agent for the private placement, received advisory fees $60,000 and $35,000 in 2003 and 2002, respectively.

During 2002, ComVest deposited $1.5 million to temporarily secure two outstanding letters of credit previously issued by Bank of America to the Company. Commonwealth was paid a fee of $30,000 for its services in arranging the deposit by ComVest.

The Company entered into an employment agreement with Travis Lee Provow in November 2002, whereby Mr. Provow agreed to serve as the Company’s Chairman of the Executive Committee (an officer position) beginning on November 25, 2002. The term of Mr. Provow’s employment was for six months and was renewable for a further six months upon the mutual agreement of both the Company and Mr. Provow. Pursuant to the terms of the employment agreement, Mr. Provow was to be paid at the rate of $180,000 per year and was issued options to purchase 166,667 shares of common stock at the exercise price of $1.80 per share. The options were issued outside of the Company’s existing stock option plan and become exercisable 40% at date of grant and increments of 20% as of each anniversary of Mr. Provow’s employment with the Company, provided that Mr. Provow remained an employee or director of the Company. Mr. Provow also served as president and managing director of Commonwealth. In August 2003, Mr. Provow resigned his position as chairman of the Company’s Executive Committee but agreed to remain on the Board as a director. The stock option agreement was amended to reduce the number of options by 50,000. In connection with the modification of Mr. Provow’s stock option agreement, the Company recorded stock compensation expense of approximately $8,000 and $26,000 for the years ended December 31, 2004 and 2003, respectively.

During 2002, the Company issued 2.9 million warrants to Commonwealth, ComVest, Shea Ventures, LLC, or Company officers, all of which are related parties, to purchase shares of the Company’s common stock at an exercise price of $0.15 per share. As of December 31, 2004, none of these warrants were outstanding.

During December 2004, Comdial entered into an agreement with Commonwealth to provide financial advisory and investment banking services related primarily to developing a strategy to convert Comdial’s existing debt to equity. Upon execution of the agreement, Comdial paid to Commonwealth $25,000.

NOTE 21. SUBSEQUENT EVENTS

In connection with the Company’s continued focus on improving cash flow from operations, the Company initiated a restructuring plan (the “2005 Plan”) during the first quarter of 2005. Pursuant to the 2005 Plan, approximately 25 employees were notified that their positions would be eliminated. These employees will receive severance and medical, life and other insurance benefits, as applicable. The Company will reflect the charges associated with the 2005 Plan in the periods affected by the restructuring activities and in which the costs are incurred.

NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)

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

In thousands except per share amounts 2004	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net sales	$	9,009		$	9,368		$	11,913		$	9,293
Gross profit		3,108			3,360			4,791			3,222
Stock compensation expense		2			9			11			2
Impairments of long-lived assets		—			—			—			157
Interest expense		646			585			657			612
Miscellaneous (income) expense		(642	)		7			(79	)		12
Net loss		(2,412	)		(2,138	)		(632	)		(2,496	)
Net loss per share:
Basic		(0.27	)		(0.24	)		(0.07	)		(0.25	)
Diluted		(0.27	)		(0.24	)		(0.07	)		(0.25	)
In thousands except per share amounts 2003	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net sales	$	12,316		$	12,974		$	12,515		$	10,136
Gross profit		4,396			5,163			4,822			2,082
Stock compensation expense		—			—			24			2
Impairments of long-lived assets		—			365			—			—
Interest expense		820			819			816			825
Miscellaneous (income) expense		(29	)		18			(1	)		(4	)
Net loss		(1,329	)		(1,062	)		(752	)		(2,948	)
Net loss per share:
Basic		(0.16	)		(0.12	)		(0.08	)		(0.33	)
Diluted		(0.16	)		(0.12	)		(0.08	)		(0.33	)

During the fourth quarter of 2003, the Company recorded certain adjustments to the consolidated financial statements.

Certain amounts disclosed above do not sum to the annual amounts due to rounding.

50

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no reported disagreements on any matter of accounting principles or practice or financial statement disclosure at any time during the twenty-four months prior to December 31, 2004.

Effective December 29, 2004, Comdial, through action of its Audit Committee, engaged Aidman, Piser & Company, P.A. as its independent registered public accounting firm for the fiscal year ended December 31, 2004. Comdial’s previous independent accountants, Ernst & Young LLP, resigned effective November 15, 2004. In connection with the audits of the two fiscal years ending December 31, 2003 and during subsequent interim periods, there have been no disagreements on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the matter in their report.

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

ITEM 9A. CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, Comdial carried out an evaluation of the effectiveness of the design and operation of Comdial’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of Comdial’s management, including Comdial’s Chief Executive Officer and Chief Financial Officer, who concluded that Comdial’s disclosure controls and procedures are effective. There have been no significant changes in Comdial’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date Comdial carried out its evaluation.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Comdial’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Comdial’s reports filed under the Exchange Act is accumulated and communicated to management, including Comdial’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

51

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors of the Company

The names and ages of the Company’s current directors, their principal occupation or employment during the past five years, and other data regarding each of them is set forth below. Pursuant to the terms of the Company’s Certificate of Incorporation and its By-laws, the Board of Directors has the power to change the number of directors by resolution. The number of directors is currently set at seven (7) members, each serving a one-year term ending as of the date of the annual meeting.

Name	Age	Current Position
Michael S. Falk	43	Chairman of the Board of Directors
Neil P. Lichtman	56	President, Chief Executive Officer and Director
Inder Tallur	40	Director

Michael S. Falk is the co-founder of Commonwealth Associates, L.P., (“Commonwealth”) a New York-based merchant bank founded in 1988, and served as chairman and chief executive officer from 1995 until 2002. Currently, he is chairman and CEO of Commonwealth Associates Group Holdings, and a managing partner of ComVest Investment Partners, L.P. (“ComVest”) and various related investment partnerships. He currently serves as a director of the CARE Fund. Mr. Falk was appointed to the Board of Directors of Comdial in October 2002 and became chairman of the Board in August 2003. He serves on Comdial’s Compensation Committee. Additionally, Mr. Falk is a director of ProxyMed, Inc. and PlanVista Corporation.

Neil P. Lichtman has been president of the Company since January 2004 and became chief executive officer and director in March 2004, when he succeeded Nickolas A. Branica who retired. Prior to joining Comdial, Mr. Lichtman was a senior vice president for Inter-Tel, Inc. from 2002 through 2003. Before Inter-Tel, Mr. Lichtman was president of Tierra Telecom in 2000 and 2001 and held several senior management positions with Claricom Holdings, Inc., including president and chief operating officer from 1996 to 1999. Claricom Holdings was acquired by Staples, Inc. in 1999 and became Staples Communications, where Mr. Lichtman served as president until 2000. Mr. Lichtman has been involved in the telecommunications industry for more than 20 years.

Inder Tallur is a partner of ComVest and was previously the director of research for Commonwealth an investment banking firm which provides services to the Company as discussed previously, where he was responsible for reviewing investment opportunities in the telecommunications and technology markets. Mr. Tallur was appointed to the Board in November 2004. Mr. Tallur joined Commonwealth in 1995 and was director of research for four years, following the technology sector. During his tenure as director of research, Mr. Tallur was responsible for selecting areas within technology and telecom for the firm’s investment program. Mr. Tallur was the portfolio manager for the ComVest Opportunity Fund L.P., which was formed in August 2001. Prior to Commonwealth, he spent 5 years in the telecommunications and computer industry with companies including Digital Equipment Corporation and HCL-HP India, a subsidiary of Hewlett Packard.

Committees of the Board and Meeting Attendance

The Board of Directors held eight (8) regularly scheduled meetings and three (3) special meetings in 2004. During 2004, all directors attended at least 75% of the aggregate number of meetings of the Board of Directors and standing committees on which they served. The Board of Directors has established four standing committees consisting of the Audit, Compensation, Nominating and Governance Committees. In addition, in 2003, the Board established a temporary Finance Committee which met once in 2004.

Audit Committee

The Audit Committee held nine (9) meetings in 2004 and its members met informally several other times. The Audit Committee’s principal functions are to recommend to the Board of Directors an independent registered public accounting firm to serve the Company each fiscal year and to review the plan and results of the audit by the independent registered public accountants as well as the scope, results, and adequacy of the Company’s systems of internal accounting controls and procedures. The Audit Committee reviews the independence of such accountants and reviews their fees for audit and non-audit services rendered to the Company. The Audit Committee is guided by a written charter. Mr. Kessman served as chairman and financial expert of the Audit Committee before his resignation in April of 2005. Mr. Blau and Mr. Doretti were members of the Audit Committee before their resignation in April of 2005, each of whom was an “independent director” as that term is defined pursuant to Rule 4200 of the NASD’s listing standards.

Audit Committee Financial Expert

The Board of Directors has determined that all Audit Committee members are financially literate under the current listing standards as set forth in the Nasdaq Marketplace Rules. The Board also determined that Alan Kessman, prior to his resignation in April of 2005, qualified as an “audit committee financial expert” as defined by the Securities and Exchange Commission (“SEC”) rules adopted pursuant to the Sarbanes-Oxley Act of 2002, and was an independent member of the Audit Committee.

Code of Ethics

The Company has adopted a code of ethics that applies to all of its directors, officers (including its chief executive officer, chief financial officer, vice president of finance, controller and any person performing similar functions) and employees.

52

Executive Officers of the Company

The following table lists the executive officers of the Company. The following table first lists the current executive officers. The table then lists persons who served as executive officers during 2004, but are not currently executive officers.

Name	Age	Current Position
Neil P. Lichtman	56	President, Chief Executive Officer and Director
Kenneth M. Clinebell	43	Senior Vice President, Chief Financial Officer, Chief Operating Officer, and Treasurer
Anne T. Prillaman	49	Vice President, Finance
Nickolas Branica	52	Former President and Chief Executive Officer

Neil P. Lichtman has been president of the Company since January 2004 and became chief executive officer and director in March 2004, when he succeeded Nickolas A. Branica who retired. Prior to joining Comdial, Mr. Lichtman was a senior vice president for Inter-Tel, Inc. from 2002 through 2003. Before Inter-Tel, Mr. Lichtman was president of Tierra Telecom in 2000 and 2001 and held several senior management positions with Claricom Holdings, Inc., including president and chief operating officer from 1996 to 1999. Claricom Holdings was acquired by Staples, Inc. in 1999 and became Staples Communications, where Mr. Lichtman served as president until 2000. Mr. Lichtman has been involved in the telecommunications industry for more than 20 years.

Kenneth M. Clinebell joined Comdial as the Company’s senior vice president, chief financial officer and treasurer in November 2002. Mr. Clinebell was promoted to chief operating officer of Comdial in July 2004. Prior to joining Comdial, Mr. Clinebell held various positions at Vicorp, Inc., currently a multi-national software development company. Mr. Clinebell joined Vicorp, Inc. in 1994 as a member of the senior executive team and was employed as chief financial officer, interim chief executive officer and a member of the Board of Directors until November 2002. Prior to joining Vicorp, Mr. Clinebell served as controller and manager of financial reporting at Kimmins Corporation, a construction real estate and insurance conglomerate, and as audit manager at Laventhal & Horwath, CPAs.

Anne T. Prillaman joined Comdial as the Company’s controller in February 2003. Ms. Prillaman was promoted to vice president of finance in July 2004. Prior to joining Comdial, Ms. Prillaman was controller for eDentalDirect, a distributor of dental supplies and equipment from July 2001 until January 2003. Prior to joining eDentalDirect, Ms. Prillaman served as corporate assistant-controller from March 1999 through May 2001 at Vicorp, Inc., a multi-national software development company.

Nickolas A. Branica was appointed president and chief executive officer of Comdial in October 2000 and retired as chief executive officer and director in March 2004. In 1992, Mr. Branica founded Key Voice Technologies, Inc. (“KVT”) in Sarasota, Florida, and served as its president and chief executive officer. In March 1996, Comdial Corporation acquired KVT with the stipulation that Mr. Branica would remain as president and chief executive officer of KVT. Prior to joining Comdial, Mr. Branica held management positions with Elcotel and Compass Technologies/Octel Corporation, both public telecommunications companies.

ITEM 11. EXECUTIVE COMPENSATION

The following sections disclose detailed information about cash and equity-based executive compensation paid by the Company to certain of its executive employees. The information is comprised of a Report of the Company’s Compensation Committee of the Board of Directors, Compensation Committee Interlocks and Insider Participation, a graph showing the Company’s five year stock performance relative to its industry, a Summary Compensation Table, and additional tables that provide further details on stock options and pension benefits.

Report of the Compensation Committee of the Board of Directors

The Company’s executive compensation package for its executive officers consists of three elements: base salary, annual performance-based incentive, and stock option grants.

Compensation Principles. The Committee believes that the executive compensation package should provide incentives to achieve both current and longer-term strategic management goals of the Company, with the ultimate objective of enhancing stockholder value. The three elements of the compensation plan are designed to achieve this objective. The base salaries are set at levels believed by the Committee to be sufficient to attract and retain qualified officers, with a significant portion of the cash compensation being in the form of performance-based incentives dependent upon meeting specified Company annual financial goals. Stock option grants are intended to serve as an incentive to achieve the overall longer-term objective of enhancing stockholder value.

Salaries. In general, base salary levels are set at levels believed by the Committee to be sufficient to attract and retain qualified executives, when considered with the other components of the executive compensation package. Annually, the Committee reviews the compensation of the executive officers. In addition, the Committee considers the compensation paid by companies in the same or similar industries. The Committee considers the remuneration analysis in conjunction with the Company’s overall performance as measured by achievement of the Company’s objectives and the development and succession of sound management practices and skilled personnel. In order to attract and retain qualified executive personnel, base salary levels have reflected a necessary balance between (i) the competitive level set by the industry and (ii) the Company’s overall financial performance and condition.

53

Annual Incentives. The Committee has established a formal plan for awarding incentive compensation to officers. The plan accounts for the cost of invested capital and is designed to focus the attention of the executive officers on both income statement and balance sheet performance. The Committee believes that the plan is supportive of the Company’s continued focus on improved financial results and positioning the Company for continued growth. Each year, the Committee sets the required levels for each performance objective. The Company’s actual performance for a year is then measured against the predetermined levels to calculate annual incentive payments, if any.

Stock Options. Stock options comprise one part of the executive compensation package. This component is intended to encourage key employees to remain in the employ of the Company by offering them an opportunity for ownership in the Company, and to provide them with a long-term interest in the Company’s overall performance as reflected by the performance in the market of the Company’s common stock. During 2004, eligible employees and directors were awarded stock options to acquire a total of 1,045,132 shares of the Company’s common stock. In addition to the foregoing, during 2003 the Company entered into an amendment to the executive employment agreement with Mr. Branica whereby, among other things, Mr. Branica was granted options to purchase 150,000 shares of common stock, and the Company agreed that, if Mr. Branica’s employment were to be terminated prior to its expiration, other than by the Company for cause, all of Mr. Branica’s outstanding unvested stock options would immediately vest and all of his stock options would remain exercisable for a period of two years from such termination, notwithstanding any contrary provision in any existing stock option agreement. Accordingly, when Mr. Branica’s employment was terminated in March 2004, all of his unvested stock options, which represented 370,612 shares, became vested and together with his then-vested options to purchase 133,577 shares, Mr. Branica holds vested options to purchase a total of 504,189 shares which shall remain exercisable until March 5, 2006.

Compensation of the Chief Executive Officer. The Committee determined the compensation of the Company’s chief executive officer, Mr. Lichtman, for the 2004 fiscal year in a manner consistent with the guidelines and policies described above.

In setting Mr. Lichtman’s compensation for 2004 and thereafter, the Committee considered the executive leadership needs of the Company, the recent financial performance of the Company and the need to maintain discipline in compensation and other operating expenses. The Committee still believes that a structure of reasonable incentives and relatively lower base pay is appropriate for the Company’s chief executive officer considering the difficulties that still face the Company, including current financial needs, ongoing product development efforts and competitive position of the Company relative to its industry. At the beginning of 2004, the base salary of the then president, Neil Lichtman was $237,500 per year. In association with his promotion to the Company’s chief executive officer in March 2004, Mr. Lichtman received a base salary increase to $250,000 per year. In consideration of the financial challenges facing the Company, including the need to limit cash expenditures, Mr. Lichtman agreed to a decrease in his annual base salary to $200,000 beginning in April, 2004. In November, 2004 as recognition for his outstanding service to the Company and its shareholders, his base salary was retroactively restored to $250,000. Mr. Lichtman was also awarded options to purchase, in the aggregate, 350,000 shares of common stock in 2004. The Committee believes that Mr. Lichtman’s total compensation for the 2004 fiscal year was appropriate in light of the above considerations.

SUBMITTED BY THE COMPENSATION COMMITTEE:

                MICHAEL S. FALK INDER TALLUR

Compensation Committee Interlocks and Insider Participation

The Compensation Committee is presently comprised of Mr. Falk and Mr. Tallur. Prior to his resignation in April of 2005, Mr. Rapetti served as the chairman of the compensation committee.

As further described under the heading Certain Relationships and Related Transactions, Mr. Falk is a manager of ComVest, the Company’s largest shareholder, and is also chairman and chief executive officer of Commonwealth, an affiliate of ComVest, and the Company’s financial and investment banking advisor and placement agent for certain bridge financings. ComVest beneficially owns approximately 36% of the Company’s common stock and is the holder of a senior note in the amount of $3,166,750 and a bridge note in the amount of $1,175,000. In his position, Mr. Falk is the beneficial owner of all shares beneficially owned by ComVest. During 2004, ComVest was paid approximately $280,000 in interest on its debt by the Company. The Company also paid Commonwealth $650,000 in 2004 upon the closing of the bridge financing agreement and $25,000 for additional consulting services in 2005. Mr. Falk beneficially owns approximately 39% of the Company’s common stock.

Five Year Total Stockholder Return

The following performance table compares the cumulative total return, assuming the reinvestment of dividends, for the period from December 31, 1999 through December 31, 2004, from an investment of $100 in (i) the Company’s common stock, (ii) the Nasdaq Market Index, and (iii) a peer group index constructed by the Company (the “Peer Group Index”).

54

COMPARE 5-YEAR CUMULATIVE TOTAL RETURN

AMONG COMDIAL CORPORATION,

NASDAQ MARKET INDEX AND PEER GROUP INDEX

	1999	2000	2001	2002	2003	2004
COMDIAL CORPORATION	100.00	10.38	3.32	0.47	1.84	0.84
PEER GROUP INDEX	100.00	30.99	76.74	84.23	103.81	119.70
NASDAQ MARKET INDEX	100.00	62.85	50.10	34.95	52.55	56.97

The Company’s common stock is traded on the OTC Bulletin Board (“OTC-BB”) under the symbol CMDZ.OB. From August 7, 2002 until January 29, 2003, the common stock was traded on the Pink Sheets Electronic Quotation System. On January 29, 2003, it became listed on the OTC-BB.

CoreData LLC supplied the necessary information to construct the table, including the Peer Group Index. The Peer Group Index consists of the following companies: Inter-Tel, Inc. and Vodavi Technology, Inc. The Company selected these two companies as the peer group because their lines of business most closely match the lines of business in which the Company is currently primarily engaged. Although Avaya Inc. and Nortel Networks are also major competitors of the Company, these two companies have been excluded from the peer group because they are much larger than the Company and derive most of their revenues from other lines of business. The returns of each peer group issuer have been weighted according to the respective issuer’s stock market capitalization at the beginning of each period for which a return is indicated.

The performance of any individual company’s common stock is influenced not only by its own performance and future prospects, but also by a number of external factors over which the company and its management have indirect or no control, including general economic conditions, expectations for the company’s future performance, and conditions affecting or expected to affect the company’s industry. In addition, stock performance can be affected by factors such as trading volume, analytical research coverage by the investment community, and the propensity of stockholders to hold the stock for investment purposes. The relative weight of these factors also changes over time. Consequently, stock performance, including measurement against indexes, may not be representative of a company’s financial performance for given periods of time.

Summary Compensation Table

The following summary compensation table presents information about the compensation paid by the Company during its three most recent fiscal years to those individuals who were (i) the Company’s chief executive officer at the end of the last completed fiscal year, or anytime during the year, regardless of compensation level and (ii) the Company’s other most highly compensated executive officer other than the CEO who was serving as an executive officer at the end of the last completed fiscal year and whose total annual salary and bonus for the last completed fiscal year exceeded $100,000 (the “Named Executive Officer”).

55

		ANNUAL COMPENSATION(1)				LONG-TERM COMPENSATION (2)
NAME AND PRINCIPAL POSITION	YEAR	BASE SALARY($)		BONUS ($)		OPTIONS GRANTED (#)	ALL OTHER COMPENSATION($)
Neil Lichtman, President and Chief Executive Officer	2004	239,291	(3)	0		350,000	784	(4)
Kenneth M. Clinebell, Senior Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer	2004 2003 2002	189,148 180,000 17,308	(5)   (7)	0 0 6,428	(8)	50,000 45,000 80,000	2,156 5,313 18	(6) (6)
Nickolas Branica, former Chief Executive Officer	2004 2003 2002	261,242 230,769 285,769		16,071 0 64,285	(8)	0 150,000 376,471	5,252 23,531 25,322	(9) (10)

(1) While the Named Executive Officer received perquisites or other personal benefits in the years shown, in accordance with Securities and Exchange Commission regulations, the value of these benefits are not indicated since they did not exceed the lesser of $50,000 or 10% of the individual’s salary and bonus in any year.

(2) All of the long term compensation described in this table is in the form of stock options and no restricted stock, stock appreciation rights or any other long term compensation was granted.

(3) Mr. Lichtman became employed by the Company in January 2004 as its president and was promoted to chief executive officer in March 2004 upon the retirement of Mr. Branica.

(4) Imputed income from group term life insurance policy.

(5) Mr. Clinebell was promoted to chief operating officer in July 2004.

(6) Includes 401(K) match and imputed income from group term life insurance policy.

(7) Mr. Clinebell became employed by the Company as its chief financial officer in November 2002.

(8) Bonus accrued based on 2002 performance and paid in installments during 2003.

(9) Includes 401(k) match, automobile payments and imputed income from group term life insurance policy.

(10) Includes country club dues, 401(k) match, automobile payments and imputed income from group term life insurance policy.

Stock Options

In 2002, the Company adopted the Comdial Corporation 2002 Employee and Non-Employee Director Stock Incentive Plan which authorized the issuance of options covering up to 666,667 shares of common stock and which has been amended since its adoption resulting in the collective increase in the number of such shares to 2,750,000 (as amended, the “2002 Plan”). The 2002 Plan was adopted with the intention of furthering the long-term stability and financial success of the Company by attracting and retaining key employees through the use of stock incentives, including stock options. The following table sets forth information concerning individual grants of stock options made under the 2002 Plan during the fiscal year ended December 31, 2004 to the CEO and the Named Executive Officer. Except as otherwise indicated in a footnote below, all option grants described below become exercisable over a three year period as follows: one-third (1/3) become exercisable on the first anniversary of the date of grant and on each subsequent anniversary, as long as the employee remains employed by the Company, an additional one-third become exercisable until all such options are exercisable.

56

Option Grants In Last Fiscal Year

INDIVIDUAL GRANTS							POTENTIAL REALIZED VALUE AT ASSUMED RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM(1)
NAME	OPTIONS GRANTED (#)	% OF TOTAL OPTIONS GRANTED TO EMPLOYEES IN FISCAL YEAR		EXERCISE OR BASE PRICE ($/SH)		EXPIRATION DATE	5% ($)		10% ($)
Neil Lichtman	225,000 125,000	22 12	% %	$ $	2.60 2.60	1/5/2014 5/26/2014	$ $	367,903 204,391	$ $	932,339 517,966
Kenneth M. Clinebell	50,000	5	%	$	2.00	7/1/2014	$	62,889	$	159,374

(1) The potential realized values in the table assume that the market price of the Company’s common stock appreciates in value from the date of grant to the end of the option term at the annualized rates of five percent and ten percent, respectively. The actual value, if any, an executive may realize will depend on the excess, if any, of the stock price over the exercise price on the date the option is exercised. There is no assurance that the value realized by an executive will be at or near the value estimated in the table.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Unexercised Option Values

				NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS AT FY- END (#)	VALUE OF UNEXERCISED IN- THE-MONEY(2) OPTIONS AT FY- END ($)
NAME	SHARES ACQUIRED ON EXERCISE (#)	VALUE(1) REALIZED ($)		EXERCISABLE/ UNEXERCISABLE	EXERCISABLE/ UNEXERCISABLE
Nickolas A. Branica	0	$	0.00	504,189/0	$459,422/$0
Neil Lichtman	0	$	0.00	0/350,000	0/0
Kenneth M. Clinebell	0	$	0.00	68,333/106,667	0/0

(1) The dollar values are calculated by determining the difference between the fair market value of the securities underlying the options and the exercise price of the options at exercise or fiscal year-end, respectively.

(2) Options are in-the-money if the fair market value of the underlying securities at the end of the current fiscal year exceeds the exercise price of the option. For purposes of this table, fair market value is $1.25 per share, the closing trading price of the common stock on December 31, 2004.

Pension Plan/Benefit Restoration Plan

The Company has a pension plan covering hourly and salaried employees, including the executive officers. The plan was frozen as of September 3, 2000. All employees ceased accruing additional retirement benefits under the plan on that date. The plan will continue to require Company contributions for tax-deferred pension accruals for benefits accrued prior to September 3, 2000. The amount of contributions was actuarially determined in order to fund for each participating employee a benefit based on the two factors of career average compensation (as of September 3, 2000) and years of service (as of September 3, 2000) of the executive officers only. Mr. Nickolas A. Branica is eligible for benefits under the pension plan because his employment with the Company commenced prior to the freezing of the plan and because he has been employed by the Company for at least five years. Mr. Branica’s estimated benefit to be paid at normal retirement is approximately $1,015 per month. Such estimated benefit is based on the following formula:

1.25% times career-average compensation (monthly average of compensation including bonuses), calculated from the date of hire (March 20, 1996 in Mr. Branica’s case) to September 3, 2000, times the number of full years worked prior to September 3, 2000 (4 years in Mr. Branica’s case); plus

57

0.65% times career-average compensation in excess of 50% of Social Security covered compensation (the average amount of the Social Security taxable wage base for the 35 calendar years ending with the year the employee reaches his normal retirement age), calculated from date of hire, times the number of full years worked prior to September 3, 2000.

For highly compensated employees, such as executive officers, the amount of benefits under the pension plan was limited in order to qualify under federal tax laws. To maintain compensation competitiveness and to restore retirement benefits for executives who were affected by tax law limits on benefits under the pension plan, the Company implemented a benefit restoration plan. However, the benefit restoration plan was frozen as of July 2000 and was terminated as of March 2002. All employees ceased the accrual of benefits under that plan effective July 26, 2000. Any employee who was not vested in the benefit restoration plan as of July 26, 2000 forfeited all benefits under that plan. The current CEO and the Named Executive Officer are not eligible for benefits under the benefit restoration plan.

Prior to September 3, 2000, the pension plan covered a participant’s compensation including bonuses and incentive pay for hourly employees and excluding deferred or supplemental compensation or other forms of compensation, if any, paid by the Company; provided however, that the amount of a participant’s annual compensation taken into account under the plan for any year was subject to certain limitations under the pension plan or in accordance with applicable law.

There are several different forms of benefit options available under the Company’s pension plan, including Straight Life Annuity, 5 Years Certain & Life Annuity, 10 Years Certain & Life Annuity, Level Income Life Annuity (age 62 and 65), Contingent Annuitant Option, and Joint and Survivor Option. The Level Income Life Annuity balances retirement income from the pension plan and social security benefits so that income remains more or less constant regardless of when social security benefits begin.

Executive Severance Plan

Effective as of September 5, 1995, the Board of Directors adopted a severance plan for the Company’s executive officers (as the same may be amended from time to time, the “Executive Severance Plan”). The Executive Severance Plan was revised as of November 15, 2000 to reduce the benefits payable under the plan. The Executive Severance Plan is designed to provide for the payment of severance benefits if an executive officer is terminated without cause, or if the executive terminates with good reason within 90 days (previously two years) after a change of control. The Executive Severance Plan covers the Company’s chief executive officer, president, senior vice presidents, chief financial officer, and vice presidents. In addition, the Compensation Committee of the Board of Directors can specifically designate other employees to participate. The persons covered by the Executive Severance Plan are hereinafter referred to as the “Covered Executives.” The severance period over which payments are made varies with the job classification of the Covered Executive as follows: (i) 18 months for the president, chief executive officer or chief financial officer (formerly 24 months for the president or chief executive officer), (ii) 6 months for a senior vice president or vice president of engineering (formerly 18 months), and (iii) 3 months for other vice presidents (formerly 12 months). Other designated participants would have individual periods established, not longer than 12 months (formerly 24 months).

Under the Executive Severance Plan, if a Covered Executive is terminated by the Company without Good Cause (as defined below) or if he or she terminates employment with Good Reason (as defined below) within 90 days (formerly 24 months) following a Change of Control (as defined below), the Covered Executive is entitled to receive monthly payments of his or her final salary (or the Covered Executive’s salary at a Change of Control, if larger). Prior to November 15, 2000, a Covered Executive’s average bonus was also covered. The Covered Executive would receive these payments even if he or she is employed by another company during the severance period. The Company may pay the severance benefit in a lump sum at its option. The Covered Executive’s spouse or other named beneficiary is entitled to any unpaid benefit after death.

In addition, the Covered Executive would receive health, life and disability insurance coverage for the severance period. The Covered Executive would have to contribute toward the premiums for any insurance to the same extent as when employed. Insurance benefits would cease if the Covered Executive is employed by another company and is covered by similar benefits.

As a condition to receiving benefits, the Covered Executive would be required to execute a complete release of the Company from all claims, including all claims relating to the Covered Executive’s employment and his or her termination of employment.

The Covered Executive’s benefit would be reduced to avoid application of the “excess parachute payment” restrictions after a Change of Control. An excess parachute payment is subject to an additional 20% excise tax payable by the employee and an excess parachute payment is not deductible by the employer. In general, an excess parachute payment is a payment made due to a Change of Control that exceeds three times the employee’s average compensation for the prior five years.

The Board of Directors can amend or terminate the Executive Severance Plan in the future, except in two circumstances. First, after a Change of Control, the Plan cannot be amended or terminated for 90 days. Second, an amendment or termination cannot affect the benefits of a terminated Covered Executive then receiving benefits.

With respect to the termination of any Covered Executive by the Company, the term “Good Cause” means the (a) fraud or material misappropriation by the Covered Executive with respect to the business or assets of the Company; (b) the persistent refusal or willful failure of the Covered Executive materially to perform his or her duties and responsibilities to the Company, which continues after the Covered Executive receives notice of such refusal or failure; (c) conduct by the Covered Executive that constitutes disloyalty to the Company and that materially harms or has the potential to cause material harm to the Company; (d) the Covered Executive’s conviction of a felony or crime involving moral turpitude; (e) the use of drugs or alcohol that

58

interferes materially with the performance by the Covered Executive of his or her duties; or (f) the violation of any significant Company policy or practice, including but not limited to the Company policy prohibiting sexual harassment.

With respect to a termination by a Covered Executive after a Change of Control, “Good Reason” would exist if, without the Covered Executive’s express written consent, (a) there is a significant adverse change in such Covered Executive’s authority or in his or her overall working environment; (b) such officer is assigned duties materially inconsistent with his or her duties, responsibilities and status at the time of a Change of Control; (c) there is a reduction, which is not agreed to by the Covered Executive, in the Covered Executive’s rate of base salary or bonus percentage; or (d) the Company changes by 50 miles or more the principal location at which such officer is employed.

Under the plan, a “Change of Control” is defined as the occurrence of any of the following events: (a) the acquisition by any unrelated person of beneficial ownership of 40% or more of the then outstanding shares of common stock of the Company (or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of Directors); (b) as a result of, or in connection with, any tender or exchange offer, merger or other business combination, sale of stock or assets or contested election, or any combination of the foregoing transactions, the persons who were Directors of the Company before such transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company; (c) approval by the stockholders of the Company of a reorganization, merger or consolidation with respect to which the persons who were shareholders of the Company immediately before the transaction do not, immediately after the transaction, beneficially own more than 50% of the then outstanding shares of common stock of the Company or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of Directors, or (d) a sale or other disposition of all or substantially all the assets of the Company, other than in the ordinary course of business.

Employment and Severance Agreements

The Company presently has an employment agreement with Mr. Lichtman, its president, chief executive officer and director. That agreement became effective in January 2004 when Mr. Lichtman became president of the Company. The agreement was amended in March 2004 when Mr. Lichtman succeeded Mr. Branica as chief executive officer. The agreement was amended again in May 2004. As amended, the agreement with Mr. Lichtman provides for a one year term with automatic renewals unless either party elects to terminate the agreement and for a base salary of $250,000 per year. In addition, Mr. Lichtman was granted options to purchase up to 225,000 shares of common stock which were priced at $2.60 per share and which become exercisable over three years, with one-third (1/3) becoming exercisable on the first anniversary of the grant and an additional one-third (1/3) becoming exercisable on each subsequent anniversary until fully vested, and as long as the agreement remains in effect. Also, in accordance with the agreement, Mr. Lichtman is eligible to receive severance equal to twelve (12) month’s salary if his employment is terminated other than voluntarily by Mr. Lichtman or by the Company for cause, including if Mr. Lichtman terminates the agreement for “good reason” within 90 days of a “change in control” of the Company. Subject to certain terms, conditions and limitations, good reason, for purposes of the agreement, includes a material change in duties or diminishment in authority, a reduction in compensation or relocation of the Company’s offices. Subject to certain terms, conditions and limitations, a change in control, for purposes of the agreement, includes: acquisition of 50% or more of the Company’s outstanding stock or voting securities by any party other than the Company, a subsidiary of the Company or a Company benefit plan; a change in a majority of the directors of the Company; or a merger or acquisition of the Company resulting in a change in ownership of at least 50% of the Company’s voting securities.

The Company had an employment agreement with Mr. Branica that was terminated in March 2004. That employment agreement was originally entered into in September 2001 and was for two years. Prior to its expiration in September 2003, the Board approved an amendment to the agreement extending the term by three years through September 2006 and providing for a salary increase from $225,000 per year to $250,000, plus annual increases of $12,500 through the term. In addition, the amendment provided for the grant of options to purchase 150,000 shares of common stock which were priced at $1.68 per share and which become exercisable over three years, with one-third (1/3) becoming exercisable on the first anniversary of the grant and an additional one-third (1/3) becoming exercisable on each subsequent anniversary until fully vested, and as long as the agreement remains in effect; provided, however, the amendment also provided that, if Mr. Branica’s employment were terminated by the Company and Mr. Branica thus became eligible for the termination benefits provided for in the employment agreement, in addition to those enumerated benefits, all of Mr. Branica’s existing outstanding unvested stock options would immediately become exercisable and together with his vested options, would remain exercisable for two years following such termination.

With the termination of Mr. Branica’s employment agreement in March 2004, Mr. Branica became eligible for the termination benefits set forth in the employment agreement, including, in addition to the acceleration and extended exercisablility of his stock options as described above, one year’s base salary ($250,000) as severance pay, paid over 12 months in accordance with the normal payroll practices of the Company, and 12 month’s medical and health insurance benefits paid for by the Company. In addition, Mr. Branica was paid for accrued but unused vacation time in the amount of $12,075.

In November 2002, the Company provided a letter to Mr. Clinebell offering him employment as the Company’s senior vice president, chief financial officer and Treasurer. The letter described some of the terms of Mr. Clinebell’s employment with the Company including an annual salary of $180,000, amongst other things. Further, the letter sets forth that, in the event of termination of Mr. Clinebell’s employment after the first year thereof, the Company would pay severance pay equal to six (6) months of Mr. Clinebell’s salary subject to the terms of the Company’s existing Executive Severance Plan, except without regard to any provision of that plan that might otherwise entitle Mr. Clinebell to severance in excess of six months. The terms, conditions and limitations of the Executive Severance Plan, including termination based on for cause, good reason and change in control are more fully described in the section titled Executive Severance Plan.

59

BOARD AND COMMITTEE MATTERS

Compensation of Directors

During 2004 all independent directors for the entire year received 60,000 stock options, which vest over a three-year period. Mr. Tallur, who joined the Board during 2004, received 30,000 stock options, which vest over a three-year period. Mr. Tallur also received 30,000 for services performed prior to becoming a Board member, which vest over a three-year period. In addition, Mr. Kessman, a former director, received 100,000 warrants as compensation for his role as chairman of the executive committee. In 2002, stockholders approved the 2002 Employee and Non-Employee Director Stock Incentive Plan (the “2002 Plan”) providing a plan for use by the Board of Directors to incentivize existing and new employees, officers and independent directors. Stockholders subsequently approved amendments to the 2002 Plan, resulting in the increase in the number of shares of common stock eligible for issuance under the 2002 Plan to a total of 2,750,000 shares from the original authorization of 666,667.

Board of Directors’ Affiliations

Mr. Lichtman is the only Company employee who is currently a director, having joined the Board in March 2004 replacing Nickolas A. Branica, the Company’s former chief executive officer and director, who retired.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information, as of April 14, 2005, as to the beneficial ownership of the common stock by (i) each stockholder known by us to own beneficially five percent or more of the outstanding shares; (ii) each of our directors; (iii) each Named Executive Officer of the Company (as that term is defined in the Summary Compensation Table); and (iv) all of our Named Executive Officers and directors as a group, together with their percentage ownership and voting power. Applicable percentage ownership is based on 9,819,143 shares of common stock outstanding as of March 28, 2005.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)		Percent of Class (1)
Robert Priddy	1,262,601	(2)	12.60	%
ComVest Venture Partners, L.P. (3)	3,606,805	(4)	36.43	%
Shea Ventures, LLC	1,707,447	(5)	17.04	%
Edmund Shea	1,712,572	(6)	17.09	%
Michael S. Falk (3)	3,846,906	(7)	38.82	%
Nickolas A. Branica	1,150,911	(9)	11.15	%
Inder Tallur (8)	40,097	(10)	0.41	%
Neil Lichtman (8)	125,000	(11)	1.26	%
Kenneth M. Clinebell (8)	68,333	(12)	0.69	%
All directors and Named Executive Officers as a group	5,231,247		52.33	%

(1) The amount and percentage of securities beneficially owned by an individual are determined in accordance with the definition of beneficial ownership set forth in the regulations of the Securities and Exchange Commission. Such amounts may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or has the right to acquire within 60 days after March 28, 2005. Beneficial ownership may be disclaimed as to certain of the securities. Unless otherwise indicated, the persons and entities named have sole voting and dispositive power over their shares. The table above sets forth beneficial ownership and percentages of beneficial ownership of common stock.

(2) Includes (a) 1,062,601 shares owned and (b) 200,000 shares subject to warrants. Mr. Priddy has a business address of 3435 Kingsboro Road, Apt. 1601, Atlanta, GA 30826.

(3) The address for ComVest, ComVest Management, LLC (“ComVest Management”), and Michael S. Falk is 830 Third Avenue, 4^th Floor, New York, NY 10022.

(4) Includes (a) 3,371,805 shares owned and (b) 235,000 shares subject to warrants. ComVest is a Delaware limited partnership whose principal business is investing in securities.

(5) Includes: (a) 1,507,447 shares owned and (b) 200,000 shares subject to warrants. Shea Ventures, LLC has a business address of 655 Brea Canyon Road, Walnut, CA 91789.

(6) Includes all shares beneficially owned by Shea Ventures, LLC, plus 5,125 shares held by Mr. Shea. Mr. Shea is manager of Shea Ventures, LLC.

60

(7) Mr. Falk is a manager of ComVest Management and is Chairman and principal stockholder of Commonwealth Associates Management Company, Inc. (“CAMC”), which is general partner of Commonwealth. In his capacity as Chairman and controlling equity owner of CAMC, Mr. Falk may be deemed to share indirect voting and dispositive power with respect to the shares beneficially owned by CAMC, ComVest and Commonwealth and may therefore be deemed to be beneficial owners of such securities. In addition, Mr. Falk is the majority member of Commonwealth Associates Group Holdings, LLC (“Commonwealth Holdings”), and may therefore be deemed to be beneficial owner of securities beneficially owned by Commonwealth Holdings. Accordingly, Mr. Falk may be deemed to be beneficial owner of the following: (a) 240,101 shares owned, (b) 1,285,679 shares beneficially owned by ComVest (see note (3) above), (c) 57,781 shares beneficially owned by Commonwealth Holdings, and (d) 2,263,345 shares beneficially owned by CAMC.

(8) c/o Comdial Corporation, 106 Cattlemen Road, Sarasota, Florida 34232.

(9) The address for Mr. Branica is 8230 Sanderling Road, Sarasota, FL 34242. Mr. Branica served as president, chief executive officer and director of the Company until January 5, 2004 and as chief executive officer and director until March 5, 2004, when he resigned. Includes: (a) 646,722 shares beneficially owned and (b) 504,189 shares subject to stock options that are exercisable.

(10) Includes (a) 10,097 shares owned and (b) 30,000 shares subject to stock options that are exercisable.

(11) Includes (a) 50,000 shares subject to warrants and 75,000 shares subject to stock options that are vested.

(12) Represents 68,333 shares subject to stock options that are exercisable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As previously disclosed, on March 12, 2004 the Company completed a bridge financing private placement (the “Bridge Financing”) in which it obtained $9 million in gross investment proceeds and issued $9 million in 8% subordinated convertible notes (“Bridge Notes”) and warrants to purchase 1.8 million shares of common stock (“Bridge Warrants”). All of the Bridge Warrants are exercisable at any time on or before February 17, 2007 at an exercise price of $3.38 per share. The total Bridge Notes issued in connection with the Bridge Financing provided for the potential issuance of common stock in excess of twenty percent (20%) of the total issued and outstanding common stock of the Company at a price that is less than the market value of the stock as of the date of such Bridge Notes. In order to comply with applicable Nasdaq Marketplace Rules, such a transaction would require stockholder approval. Accordingly, the Company obtained the approval of a majority of its stockholders by resolutions signed by stockholders representing approximately 66% of the Company’s outstanding common stock (collectively, the “Majority Stockholders”) and on April 2, 2004 filed a definitive Information Statement pursuant to Regulation 14C of the Securities and Exchange Act of 1934. On or about April 22, 2004, stockholder approval occurred in accordance with such regulation (hereafter “Effective Stockholder Approval”). Commonwealth served as the Company’s placement agent for the Bridge Financing and was paid $675,000 for such service. Commonwealth also is the Company’s financial and investment banking advisor.

As also disclosed in the aforementioned Information Statement and in connection with the Bridge Financing, the Company entered into an amendment with certain holders of 7% senior subordinated secured convertible notes that were issued in 2002 in connection with a private placement (the “Senior Notes”). Such holders included Comvest, Shea Ventures, LLC (“Shea”) and Robert Priddy, representing more than 50% of the outstanding principal amount of the Senior Notes. In accordance with the terms of the Senior Notes, said amendment (the “Senior Notes Amendment”), having been approved by the holders of a majority of the outstanding principal amount, is effective with respect to all of the outstanding Senior Notes. The Senior Notes Amendment extends the maturity of the Senior Notes by one year to September 27, 2006, and gives the holders of the Senior Notes a conversion option.

ComVest beneficially owns approximately 36% of our common stock and is the holder of a Senior Note in the amount of $3,166,750 and a Bridge Note in the amount of $1,175,000. ComVest entered into the Senior Notes Amendment, and as one of the Majority Stockholders, ComVest voted its shares in favor of the Bridge Financing and the Senior Notes Amendments. ComVest may convert its Senior Note pursuant to the terms of the Senior Notes Amendments upon Effective Stockholder Approval. Upon such conversion, ComVest would obtain an additional 936,909 shares of our common stock. Additionally, ComVest was issued Bridge Warrants for up to 235,000 shares of common stock. Michael S. Falk, Comdial’s chairman, is a manager of ComVest and is chairman and chief executive officer of Commonwealth. Commonwealth is an affiliate of ComVest. Mr. Falk beneficially owns all stock beneficially owned by ComVest.

Shea beneficially owns approximately 17% of our common stock and is the holder of a Senior Note in the amount of $3,411,683 and a Bridge Note in the amount of $1 million. Shea entered into the Senior Notes Amendment and, as one of the Majority Stockholders, Shea voted its shares in favor of the Bridge Financing and the Senior Notes Amendment. Shea may convert its Senior Note pursuant to the terms of the Senior Notes Amendments upon Effective Stockholder Approval. Upon such conversion, Shea would obtain an additional 1,009,374 shares of our common stock. Additionally, Shea was issued Bridge Warrants for up to 200,000 shares of common stock.

Robert Priddy beneficially owns approximately 13% of our common stock and is the holder of a Senior Note in the amount of $1,911,683 and a Bridge Note in the amount of $1 million. Mr. Priddy entered into the Senior Notes Amendment and, as one of the Majority Stockholders, Mr. Priddy voted his shares in favor of the Bridge Financing and the Senior Notes Amendment. Mr. Priddy may convert his Senior Note pursuant to the terms of

61

the Senior Notes Amendments upon Effective Stockholder Approval. Upon such conversion, Mr. Priddy would obtain an additional 565,587 shares of our common stock. Additionally, Mr. Priddy was issued Bridge Warrants for up to 200,000 shares of common stock.

Neil P. Lichtman is the president, chief executive officer and a director of the Company. Mr. Lichtman beneficially owns less than 2% of our common stock. Mr. Lichtman is the holder of a Bridge Note in the amount of $250,000 and was issued Bridge Warrants for up to 50,000 shares of common stock.

Nickolas A. Branica served as the Company’s chief executive officer and as a director until his resignation on March 5, 2004. Mr. Branica beneficially owns approximately 11% of our common stock and is the holder of a Senior Note in the amount of $433,350. As one of the Majority Stockholders, Mr. Branica voted his shares in favor of the Bridge Financing and the Senior Notes Amendment. Mr. Branica may convert his Senior Note pursuant to the terms of the Senior Notes Amendments upon Effective Stockholder Approval. Upon such conversion, Mr. Branica would obtain an additional 128,210 shares of our common stock.

Alan Kessman was a director of the Company, and served as chairman of the Audit Committee and as non-executive chairman of the Company’s Executive Committee. Mr. Kessman beneficially owns approximately 1% of our common stock. Mr. Kessman is managing partner of PS Capital LLC and, accordingly, is the beneficial owner of the shares beneficially owned by PS Capital. Stanley M. Blau was a director and beneficially owns less than 1% of our common stock. Mr. Blau is managing director of PS Capital and, accordingly, is the beneficial owner of shares beneficially owned by PS Capital. PS Capital is the holder of a Senior Note in the amount of $50,000 and a Bridge Note in the amount of $250,000. PS Capital may convert its Senior Note pursuant to the terms of the Senior Notes Amendments upon Effective Stockholder Approval. Upon such conversion, PS Capital LLC would obtain an additional 14,793 shares of our common stock. Additionally, PS Capital was issued Bridge Warrants for up to 50,000 shares of common stock.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Under the rules and regulations of the Securities and Exchange Commission, the Company’s consolidated financial statements are required to be audited by an independent registered public accounting firm.

Subject to ratification by the stockholders at the Annual Meeting, the Audit Committee and the Board of Directors have selected Aidman Piser & Company, P.A. to serve as independent registered public accountants to audit the consolidated financial statements of the Company for the years ended December 31, 2004 and 2005. Aidman Piser & Company, P.A. replaced Ernst & Young LLP (who resigned effective with the filing of the third quarter 2004 Form 10-Q) as the Company’s registered certified public accountants.

Audit Fees

Fees billed for audit services by Ernst & Young LLP totaled approximately $334,000 in 2004 and approximately $296,000 in 2003, including fees associated with the annual audit, reviews of the Company’s quarterly reports on Form 10-Q and other SEC filings, and accounting consultations related to matters arising in the audit or quarterly reviews. Fees billed by Aidman Piser & Company, P.A. who now perform the annual audit, during 2004 for the 2004 audit services were $12,000.

Audit Related Fees

No assurance or related services have been performed by Ernst & Young LLP or Aidman Piser & Company, P.A. for the Company in the last two fiscal years.

Tax Fees

Fees for tax compliance, tax advisory, or tax planning services for Aidman Piser & Company, P.A. totaled approximately $9,000 for 2003 and $27,000 for 2004.

No tax compliance, tax advisory or tax planning services were performed by Ernst & Young LLP for the Company in the last two fiscal years.

All Other Fees

All other fees were $1,500 per year and relate to a subscription fee paid for the Ernst & Young online accounting and auditing research tool in 2003 and 2004.

Pre-Approval Policies and Procedures

The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services and other services performed by the independent registered public accountants. The policy provides for the pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent registered public accountant is engaged to perform it. The Audit Committee has delegated to the chair of the Audit Committee authority to approve permitted services provided that the chair reports any decisions to the Committee at its next scheduled meeting.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
1.	Audited Consolidated Financial Statements of Comdial Corporation and its Subsidiaries
		Report of Independent Registered Public Accounting Firm Report of Independent Certified Public Accountants
			Financial Statements:
			Consolidated Balance Sheets - December 31, 2004 and 2003
			Consolidated Statements of Operations - Years ended December 31, 2004, 2003 and 2002
			Consolidated Statements of Stockholders’ Equity (Deficit) - Years ended December 31, 2004, 2003 and 2002
			Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 and 2002
			Notes to Consolidated Financial Statements - Years ended December 31, 2004, 2003 and 2002

62

2. Financial Statement - Supplemental Schedule:

Schedule II - Valuation and Qualifying Accounts

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

3. Exhibits Included herein:

Exhibit No.	Description
(3)	Articles of Incorporation and Bylaws:
3.1	Bylaws of Comdial Corporation (Exhibit 3.3 to Registrant’s Form 10-K for the year ended December 31, 1993)*
3.2	Form of Fourth Amended and Restated Certificate of Incorporation of Comdial Corporation (Exhibit A to Schedule 14C dated December 6, 2002)*
(4)	Instruments Defining the Rights of Security Holders:
4.1	Form of Bridge Subscription Agreement dated June 20, 2002 (Exhibit 4.1 to Form 8-K dated June 21, 2002)*
4.2	Form of Senior Subordinated Secured Convertible Note Issued by Comdial Corporation (Exhibit 4.2 to Form 8-K dated June 21, 2002)*
4.3	General Security Agreement between Comdial Corporation and ComVest Venture Partners, L.P., as agent, dated June 21, 2002 (Exhibit 4.3 to Form 8-K dated June 21, 2002)*
4.4	Advisory Warrant to purchase Common Stock issued by Comdial Corporation to Commonwealth Associates, L.P. (Exhibit 4.4 to Form 8-K dated June 21, 2002)*
4.5	Form of Private Placement Subscription Agreement dated as of September 27, 2002 (Exhibit 4.1 to Form 8-K/A dated September 25, 2002)*
4.6	Form of 7% Senior Subordinated Secured Convertible Note dated September 27, 2002 (Exhibit 4.2 to Form 8-K/A dated September 25, 2002)*
4.7	Form of Private Placement Warrant to Purchase Common Stock (Exhibit 4.3 to Form 8-K/A dated September 25, 2002)*
4.8	Form of Private Placement Warrant to Purchase Common Stock, with forfeiture provision (Exhibit 4.4 to Form 8-K/A dated September 25, 2002)*
4.9	General Security Agreement between Comdial Corporation and Commonwealth Associates L.P. (Exhibit 4.5 to Form 8-K/A dated September 25, 2002)*
4.10	Form of Private Placement Subscription Agreement between Comdial Corporation and Winfield Capital Corp. (Exhibit 4.6 to Form 8-K/A dated September 25, 2002)*
4.11	Form of 12% Senior Subordinated Secured Convertible Note between Comdial Corporation and Winfield Capital Corp. (Exhibit 4.7 to Form 8-K/A dated September 25, 2002)*
4.12	Form of Warrant to Purchase Common Stock to Winfield Capital Corp. (Exhibit 4.8 to Form 8-K/A dated September 25, 2002)*
4.13	Form of General Security Agreement between Comdial Corporation and Winfield Capital Corp. dated as of September 27, 2002 (Exhibit 4.9 to Form 8-K/A dated September 25, 2002)*
4.14	Form of Warrant to Purchase Common Stock to Commonwealth Associates L.P. (Exhibit 4.10 to Form 8-K/A dated September 25, 2002)*
4.15	Form of Senior Subordinated Secured Convertible Note Issued by Comdial Corporation dated February 2004 (Exhibit A to Schedule 14C dated March 23, 2004)*
4.16	Form of Bridge Warrant to purchase Common Stock dated February 2004 (Exhibit B to Schedule 14C dated March 23, 2004)*

63

4.17	Form of Amendment to 7% Senior Subordinated Secured Convertible Note dated February 2004 (Exhibit C to Schedule 14C dated March 23, 2004)*
4.18	Form of Bridge Subscription Agreement dated February 2004 (Exhibit 4.18 to Form 10-K dated March 30, 2004)*
(10)	Material Contracts:
10.1	Registrant’s 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan (Exhibits 28.1 and 28.2 of Registrant’s Form S-8 dated October 21, 1992)**
10.2	Amendment No. 1 to the Registrant’s 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan (Exhibit 10.1 and 10.2 of Registrant’s Form 10-Q dated September 28, 1997)**
10.3	Amendment No. 2 to the Registrant’s 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan (Exhibit 10.2 of Registrant’s Form 10-Q dated June 30, 1996)**
10.4	Amendment No. 3 to the Registrant’s 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan (Exhibit 10.3 of Registrant’s Form 10-Q dated June 30, 1996)**
10.5	Amendment to Amendment No. 3 to the Registrant’s 1992 Non-employee Directors Stock Incentive Plan (Exhibit 10.5 to Registrant’s Form 10-K for the year ended December 31, 1997)**
10.6	Amendment No. 4 to the Registrant’s 1992 Stock Incentive Plan (Exhibit 10.6 to Registrant’s Form 10-K for the year ended December 31, 1997)**
10.7	Amendment No. 4 to the Registrant’s 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.7 to Registrant’s Form 10-K for the year ended December 31, 1997)**
10.8	The Registrant’s Executive Stock Ownership Plan effective January 1, 1996 (Exhibit 10.10 to Registrant’s Form 10-K for the year ended December 31, 1995)**
10.9	Amendment No. 1 to the Registrant’s Executive Stock Ownership Plan dated July 31, 1997 (Exhibit 10.17 to Registrant’s Form 10-K for the year ended December 31, 1997)**
10.10	Amendment No. 2 to the Registrant’s Executive Stock Ownership Plan dated January 1, 1998 (Exhibit 10.18 to Registrant’s Form 10-K for the year ended December 31, 1997)**
10.11	The Registrant’s Executive Severance Plan dated August 31, 1995 (Exhibit 10.11 to Registrant’s Form 10-K for the year ended December 31, 1995)**
10.12	Amendment No. 1 to the Registrant’s Executive Severance Plan dated July 31, 1997 (Exhibit 10.19 to Registrant’s Form 10-K for the year ended December 31, 1997)**
10.13	Second Amendment to Comdial’s 401(k) Plan dated November 29, 1998 (Exhibit 10.25 to Registrant’s Form 10-K for the year ended December 31, 1998)**
10.14	Third Amendment to Comdial’s 401(k) Plan dated February 8, 1999 (Exhibit 10.17 to Registrant’s Form 10-K for the year ended December 31, 1999)**
10.15	Comdial’s Retirement Benefit Restoration Plan (Exhibit 10.19 to Registrant’s Form 10-K for the year ended December 31, 1999)**
10.16	Strategic Alliance Agreement dated March 31, 2000 between the Registrant and ePHONE Telecom, Inc. (Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended April 2, 2000)*
10.17	Patent License Agreement dated March 17, 2000 between the Registrant and Lucent Technologies GRL Corporation (Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended April 2, 2000)*
10.18	Amendment No. 5 to the Registrant’s 1992 Stock Incentive Plan (Exhibit 99.1 to Registrant’s Form S-8 dated November 15, 2000)**

64

10.19	Agreement of Sale and Purchase dated March 9, 2001 between the Registrant and Seminole Trail Properties, LLC (Exhibit 3.1 to Registrant’s Form 8-K filed March 26, 2001)*
10.20	Deed of Lease dated March 9, 2001 between Seminole Trail Properties, LLC and the Registrant (Exhibit 10.1 to Registrant’s Form 8-K filed March 26, 2001)*
10.21	Form of Lock-Up Agreement by and between officers and directors and Comdial Corporation dated June 2002 (Exhibit 10.1 to Form 8-K dated June 21, 2002)*
10.22	Form of Irrevocable Limited Proxy granted by officers and directors to ComVest Venture Partners, L.P. dated June 20, 2002 (Exhibit 10.2 to Form 8-K dated June 21, 2002)*
10.23	Amendment to Employment Agreement by and between Nicholas Branica and Comdial Corporation dated June 21, 2002 (Exhibit 10.3 to Form 8-K dated June 21, 2002)**
10.24	Form of 2002 Employee and Non-Employee Director Stock Incentive Plan (Exhibit B to Schedule 14C dated December 6, 2002)**
10.25	Form of Employment Agreement by and between Comdial Corporation and Travis Lee Provow dated November 18, 2002 (Exhibit C to Schedule 14C dated December 6, 2002)**
10.26	Form of Employment Letter to Kenneth Clinebell from Comdial Corporation dated November 15, 2002 (Exhibit D to Schedule 14C dated December 6, 2002)**
10.27	Form of Employment Agreement by and between Comdial Corporation and Neil P. Lichtman dated December 24, 2003 (Exhibit 10.37 to Form 10-K dated March 30, 2004)**
10.28	Form of Amendment to Employment Agreement by and between Comdial Corporation and Neil P. Lichtman dated March 9, 2004 (Exhibit 10.38 to Form 10-K dated March 30, 2004)**
10.29	Form of Indemnification Agreement by and between Comdial Corporation and its Directors or Officers dated 2003 **
10.30	Amendment to Employment Agreement by and between Comdial Corporation and Nickolas Branica dated September 28, 2003 **
10.31	Form of Business Loan and Security Agreement dated October 1, 2004
10.32	Form of Comdial Corporation Term Loan Note dated October 1, 2004
10.33	Form of Warrant to Purchase Common Stock dated October 1, 2004
10.34	Form of Subordination Agreement dated September 30, 2004
10.35	Form of Amendment to Employment Agreement by and between Comdial Corporation and Neil P. Lichtman dated May 1, 2004
10.36	Silicon Valley Bank Loan and Security Agreement dated April 28, 2004
10.37	Silicon Valley Bank First Loan Modification Agreement
10.38	Silicon Valley Bank Second Loan Modification Agreement
10.39	Silicon Valley Bank Third Loan Modification Agreement
(21)	Subsidiaries of the Registrant (Exhibit 21.1 to Registrant’s Form 10-K for the year ended December 31, 2004)
(23)	Consents
23.1	Consent of Aidman, Piser & Company, P.A.
23.2	Consent of Ernst & Young LLP
(24)	Power of Attorney (Exhibits 24.1 and 24.2 to Registrant’s Form 10-K for the year ended December 31, 2004)
(31)	Section 302 Certifications:
31.1	Certification of Neil P. Lichtman, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

65

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

* Incorporated by reference herein.

** Management contract or compensatory plan incorporated by reference herein.

66

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of April, 2005.

COMDIAL CORPORATION
By:	/s/ Kenneth M. Clinebell
	Kenneth M. Clinebell
	Chief Operating Officer,
	Chief Financial Officer and
	Senior Vice President
	(Principal Financial Officer and
	Principal Accounting Officer)

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

Signature	Title	Date
*	Chairman of the Board	April 14, 2005
Michael S. Falk
/s/ Neil P. Lichtman Neil P. Lichtman	President, Chief Executive Officer and Director (Principal Executive Officer)	April 14, 2005
/s/ Kenneth M. Clinebell Kenneth M. Clinebell	Chief Operating Officer, Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)	April 14, 2005
* Inder Tallur	Director	April 14, 2005

* By:	/s/ Kenneth M. Clinebell
	Kenneth M. Clinebell, pursuant to the power
	of attorney contained in
	Exhibit 24 to Registrant’s Form 10-K
	for the year ended December 31, 2004

67

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

COMDIAL CORPORATION

DECEMBER 31, 2004

In Thousands

COL. A Description	COL. B Balance at Beginning of Period		COL. C Additions Charged to Costs and Expense			COL. D Charged to Other Accounts	COL E. Deductions			COL F. Balance at End of Period
Year Ended December 31, 2004:
Deducted from asset accounts:
Allowance for doubtful accounts	$	266	$	5			$	(40	)*	$	231
Allowance for sales returns and price protection		816		196				(540	)		472
Allowance for inventory obsolescence		2,348		16				(1,059	)**		1,305
Deferred tax asset valuation allowance		41,527		2,846							44,373
Total	$	44,957	$	3,063			$	(1,639	)	$	46,381
Year Ended December 31, 2003:
Deducted from asset accounts:
Allowance for doubtful accounts	$	700	$	(129	)		$	(305	)*	$	266
Allowance for sales returns and price protection		480		336				—			816
Allowance for inventory obsolescence		1,125		1,750				(527	)**		2,348
Deferred tax asset valuation allowance		41,910		—				(383	)***		41,527
Total	$	44,215	$	1,957			$	(1,215	)	$	44,957
Year Ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts	$	3,533	$	636			$	(3,469	)*	$	700
Allowance for sales returns and price protection		223		257				—			480
Allowance for inventory obsolescence		4,022		937				(3,834	)**		1,125
Deferred tax asset valuation allowance		42,418		—				(508	)***		41,910
Total	$	50,196	$	1,830			$	(7,811	)	$	44,215

* Write off uncollectible accounts

** Write off obsolete inventory

*** Reduction in deferred tax assets

68

EX-10.31

Exhibit 10.31

BUSINESS LOAN AND SECURITY AGREEMENT

BY AND BETWEEN

COMDIAL CORPORATION

AND

[REDACTED] CORPORATION

DATED: October 1, 2004

BUSINESS LOAN AND SECURITY AGREEMENT BETWEEN

COMDIAL CORPORATION (“Lender”) and

[REDACTED] (“Borrower”)

THIS BUSINESS LOAN AND SECURITY AGREEMENT (“Agreement”) is made this 1st day of October, 2004 between COMDIAL CORPORATION, a Delaware corporation, maintaining an office at 106 Cattlemen Road, Sarasota, Florida 34232 (“Lender”) and [REDACTED], a [REDACTED] corporation, maintaining an office at [REDACTED] (“Borrower”), [REDACTED] and [REDACTED] (“[REDACTED]”), and [REDACTED] and [REDACTED] (“[REDACTED]”) (individually, and jointly, the “Sureties”).

Background

A. Borrower desires to obtain certain secured credit facilities from Lender pursuant to the terms and provisions of this Agreement for the purposes described in this Agreement.

B. Lender will extend such secured credit facilities to Borrower on the terms and provisions set forth in this Agreement.

C. Lender shall extend to Borrower a term loan in the original principal amount of Eight Hundred Thousand Dollars ($800,000.00) (the “Loan”).

D. Lender and Borrower desire to set forth in writing their present understandings and agreements pertaining to the Loan.

NOW THEREFORE, in consideration of the premises and the covenants contained in this Agreement and intending to be legally bound hereby, Lender and Borrower agree as follows:

ARTICLE I. TERM LOAN

1.1 Term Loan. Lender shall loan to Borrower the Loan in the original principal amount of Eight Hundred Thousand Dollars ($800,000.00).

1.2 Purpose of the Loan. Borrower shall use the proceeds of the Loan solely to assist in refinancing existing debt to Sovereign Lender.

1.3 Interest Rate on the Loan. Lender shall charge Borrower interest on the outstanding and unpaid principal balance of the Loan at a fixed interest rate equivalent to eight percent (8%) per annum.

1.4 Maturity Date of the Loan. The Loan shall mature September 30, 2005 at which time the entire outstanding and unpaid principal balance of the Loan plus all unpaid and accrued interest thereon and all other sums due thereunder shall be paid by Borrower to Lender.

1.5 Repayment of Principal and Payment of Interest on the Term Loan. Borrower shall repay principal and pay interest on the Loan as follows:

(a) Commencing on November 1, 2004 and on the first day of each consecutive month thereafter, eleven (11) consecutive monthly interest only payments, each in the amount of Eight Thousand Dollars ($5,333.33).

1

(b) The entire outstanding and unpaid principal balance of the Term Loan together with all unpaid and accrued interest thereon and all other sums due thereunder shall be paid on or before September 30, 2005.

ARTICLE II. SECURITY FOR THE LOANS

2.1 Security for the Loan. As security for the Loan, the repayment of principal, all interest due thereon and to become due thereon and for any other past, present or future indebtedness due Lender by Borrower and/or Sureties plus interest due or to become due thereon, and for the reimbursement of all expenses incurred by Lender in the enforcement of its rights under this Agreement or under any documentation given at any time by Borrower and/or Sureties to Lender for other obligations due Lender by Borrower and/or Sureties:

(a) Borrower grants and conveys to Lender a continuing lien security interest, subordinated to the liens of Affinity Bank of [REDACTED], in all accounts, accounts receivable, chattel paper, instruments, documents and general intangibles now owned or hereafter acquired by Borrower or in which Borrower now has or may hereafter acquire an interest of any kind; all now owned or hereafter acquired inventory and goods held by Borrower for sale or lease or furnished, or to be furnished, to or for the account of Borrower’s customers as part of services performed or consumed in Borrower’s business, including, but not limited to, all presently owned or hereafter acquired raw materials, component parts, work in process, finished goods, wrapping, packing, containing and shipping materials, all additions and accessions and the resulting product of the foregoing and any documents or instruments related to or representing all or any part of such inventory or goods; all machinery, equipment, furnishings, furniture, fixtures, new or used motorized or non-motorized vehicles which are titled and untitled, and all other tangible personal property, all of which are now owned or hereafter acquired or in which Borrower now has or hereafter may acquire an interest, wherever located, all subordinations, intellectual property, including but not limited to, trademarks, patents, copyrights, trade names, trade secrets, licenses, franchises, tax refunds, and all deposit accounts and other funds and property of Borrower now or at any time hereafter on deposit with or in possession of Lender or its agent or now or hereafter owing by Lender to Borrower now or hereafter mortgaged, liened, pledged, or secured in favor of Lender for any reason, together with all cash and non-cash proceeds of the foregoing property, including the proceeds of any insurance policies, (excluding life insurance proceeds), all products thereof, all goods or documents evidenced by any replacements and increases thereof, all parts, fittings, accessories, special tools, dies and supplies held in connection therewith, all books and records, including computer records of any nature whatsoever relating to such property, and all rights to payment and other rights accruing to Borrower by reason of its interest in the foregoing property (collectively the “Collateral”).

(b) Financing statements covering the Collateral shall be filed of record for the benefit of Lender (the “Financing Statements”).

(c) Borrower shall execute and deliver to Lender a promissory note for the original principal amount of Eight Hundred Thousand Dollars ($800,000.00) (the “Note”).

2

The suretyships referred to in Section 2.1 of the Agreement are collectively called the “Suretyships.” Each of the Note and Suretyships contains a provision for the confession of judgment against Borrower and/or the Sureties upon the occurrence of an Uncured Event of Default as defined in this Agreement.

(d) The Sureties shall execute and deliver unlimited Suretyship Agreements and disclosures for confession of judgment.

(e) The [REDACTED] shall execute and deliver to Lender a fourth lien mortgage on their real property, with improvements, located at [REDACTED].

(f) The [REDACTED] shall execute and deliver to Lender a fourth lien mortgage on their real property, with improvements, located at [REDACTED].

2.2 Additional Loan Documentation. Lender may require additional loan documentation, in its reasonable discretion, in order to obtain and perfect the liens and security interests in favor of the Lender provided for in this Agreement. All loan documentation referred to in this Article 2 of the Agreement shall be in a form satisfactory to Lender in its sole discretion.

ARTICLE III. SALE OF ASSETS TO [REDACTED]

3.1 [REDACTED] Sale. Borrower shall, within five (5) business days after the date of this Agreement, enter into and consummate a transaction with [REDACTED] (“[REDACTED]”), pursuant to which (i) Borrower shall sell the [REDACTED] operations of the Borrower’s business (the “[REDACTED]”) to [REDACTED] in exchange for the redemption of [REDACTED] equity ownership interest in the Borrower and the cancellation of certain debt pursuant to the terms of an Asset Purchase Agreement between the parties, or (ii) [REDACTED] redeems its equity ownership interest in the Borrower and cancels its debt pursuant to the terms of a separate Agreement signed on October 1, 2004 between the Borrower and [REDACTED].

3.2 Default of Interest Rate. If the Borrower fails to comply with Section 3.1, Lender shall increase the interest rate charged on the Loan to 24% (the “Default Interest Rate”), for the remaining term of the Loan.

ARTICLE IV. EQUITY INTEREST

4.1 Lender’s Equity Interest in Borrower. Borrower shall issue to Lender at the closing of the Loan, an equity interest in the Borrower equal to 3% of the ownership of Borrower of a fully diluted basis, in the form of Common Stock of the Borrower or warrants to purchase Common Stock of the Borrower.

4.2 Adjustment And Antidilution Provisions. In case the Borrower shall hereafter (i) declare a dividend or make a distribution on its outstanding Common Stock or on its Series B Preferred Stock, either in shares of Common Stock or in shares of Series B Preferred Stock, (ii) subdivide or reclassify its outstanding Common Stock or its Series B Preferred Stock into a greater number of shares, or (iii) combine or reclassify its outstanding Common Stock or Series

3

B Preferred Stock into a smaller number of shares, (iv) make any other issuance of shares of Common Stock of Series B Preferred Stock, the Borrower shall issue additional shares of Common Stock so that the number of shares held by Lender shall remain equal to 3% on a fully diluted basis. Such adjustment shall be made successively whenever any event listed above shall occur.

4.3 Right of First Refusal. In the event that Lender shall receive in writing a bona fide offer from an unaffiliated third party (a “Bona Fide Purchaser”) that it desires to accept for the purchase of Lender’s Common Stock (or a portion thereof) (the “Offered Shares”) Lender shall give written notice (the “Offer Notice”) thereof to Borrower setting forth, with specificity, the terms and conditions of the proposed transaction, and the identity, background, address, telephone number and principal business affiliation of the Bona Fide Purchaser(s) and attaching a copy of the Bona Fide Purchaser’s written third party offer. Borrower shall have the exclusive option, for a period of 10 business days after receipt of the Offer Notice, to deliver to Lender written notice (the “Election Notice”) electing to purchase such Offered Shares (or portion thereof) at the same price and other terms as set forth in the Offer Notice. In event that Borrower shall fail collectively to elect to purchase the entire Offered Interest, then the Lender shall be under no obligation to sell any portion of the Offered Interest to the Borrower and the Lender shall have the right to consummate the proposed sale on the same terms and conditions, and to the same Bona Fide Purchaser(s), as set forth in the Offer Notice hereunder.

ARTICLE V. FINANCIAL COVENANTS AND FINANCIAL STATEMENTS OF BORROWER

5.1 Financial Covenants of Borrower. Borrower covenants with Lender, which covenants shall survive the execution and delivery of this Agreement, that:

(a) Intentionally Omitted.

(b) Borrower will maintain a minimum cash flow (defined as “EBITDA” less distributions) to debt service ratio of 1.25 to 1.0 for the term of the Loan. This financial covenant shall be measured annually as of December 31 of each year.

(c) Borrower will maintain a capital base requirement of not less than $800,000.00. This financial covenant shall be measured quarterly, beginning December 31, 2004.

(d) Borrower may expend capital expenditures of no more than $200,000.00 annually. This financial covenant shall be measured annually, beginning December 31, 2004, in accordance with generally accepted accounting principles consistently applied.

5.2 Financial Statements of Borrower. Borrower shall deliver to Lender the following financial statements, in form and substance satisfactory to the Lender, during the term of the Loan:

(a) Within one hundred twenty (120) days after the end of its fiscal year, its annual financial statements audited by a certified public accountant satisfactory to Lender, in a form satisfactory to Lender, for its preceding fiscal year.

4

(b) Within thirty (30) days after the end of each calendar quarter, internally prepared interim financial statements of Borrower for the preceding calendar quarter, certified by its chief financial officer.

All financial statements of Borrower to be delivered to Lender shall be prepared in accordance with generally accepted accounting principles consistently applied.

ARTICLE VI. INSURANCE

6.1 Insurance Coverage. Borrower, at its expense, shall maintain the following insurance coverages:

(a) Physical damage insurance, fire and extended coverage, vandalism and theft insurance in an amount satisfactory to Lender covering the property being the Collateral for the security interest granted to Lender in this Agreement.

(b) Public liability insurance coverage in an amount satisfactory to Lender pertaining to any premises leased by Borrower at which Borrower operates its business and Borrower’s vehicles.

(c) Business interruption insurance for Borrower’s places of business and operations in such amounts satisfactory to Lender.

(d) Extended coverage insurance on all real estate and improvements on which the Lender has or will have a mortgage lien under the terms of this Agreement, naming the Lender as Loss Payee and Fourth Mortgagee.

The insurance coverages and policies referred to in this paragraph are collectively referred to as the “Insurance Coverage”.

6.2 Additional Insurance Provisions. Any policy of insurance referred to in Section 5.1 shall be with a company satisfactory to Lender. Lender shall be named as a loss payee under the policy referred to in subparagraph (a) of the preceding paragraph. Copies of the policies of insurance coverage referred to in the preceding paragraph shall be delivered to Lender. Any insurance policy to be delivered to Lender shall provide that the insurer shall not amend or cancel such policy prior to it giving Lender thirty (30) days written notice of such cancellation.

ARTICLE VII. REPRESENTATIONS, COVENANTS AND NEGATIVE COVENANTS OF BORROWER

7.1 Representations of Borrower. Borrower represents to Lender, which representations shall survive the execution and delivery of this Agreement, that:

(a) Borrower is a duly incorporated corporation in good standing under the laws of the Commonwealth of [REDACTED].

(b) Borrower has all requisite power to own its property and to carry out its business as now conducted.

5

(c) Borrower has the power to execute, deliver and perform this Agreement and all loan documentation referred to in this Agreement to which it is a party.

(d) Borrower has the power to borrow under this Agreement and all loan documentation referred to in this Agreement.

(e) Borrower has the full power and authority to perform and observe the terms and provisions of this Agreement and all loan documentation referred to in this Agreement.

(f) All action on Borrower’s part and on the part of its officers, directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the loan documentation referred to herein has been taken.

(g) No consent, permission, authorization, order or license of any governmental authority is necessary in connection with the execution, delivery and/or performance of this Agreement and the loan documentation referred to herein or any transaction contemplated in this Agreement.

(h) All financial statements and other statements previously or hereafter given by or on behalf of Borrower to Lender are or will be (when furnished) true, correct and substantially complete as of the date of their preparation and do or will (when furnished) present fairly, accurately and completely the financial position of Borrower and the results of their operations as of the dates and for the periods for which the same are furnished. All potential or contingent losses are accrued, reflected or reserved against or otherwise disclosed in such financial statements and/or footnotes thereto.

(i) There are no suits, investigations, tax claims or other legal proceedings now pending or threatened, and there are no unasserted claims that are known to Borrower which would materially and adversely affect the financial condition of the Borrower.

(j) All statements as to ownership and other statements given to Lender by or on behalf of Borrower are true and correct and substantially complete, and Borrower has good and marketable title, in fee simple, to the Collateral.

(k) As of the date of this Agreement, Borrower has filed all federal and state tax returns which it is required to file, and has paid or made adequate provision for the payment of all taxes which have been or may become due pursuant to said returns, or pursuant to any assessment received by Borrower in relation thereto.

(l) There is no charter, bylaw or capital stock provision of Borrower and no provision of any indenture or agreement to which Borrower is a party or under which the Borrower and/or any of its property are bound, nor is there any statute, rule or regulation or any judgment, decree of any court or agency binding upon Borrower and/or any of Borrower’s property which would be contravened by the execution and/or delivery of this Agreement, any loan documentation referred to in this Agreement or by the performance of any provision, condition, covenant or other term of this Agreement.

6

(m) Upon the execution and delivery to Lender of this Agreement and the loan documentation referred to herein and the subsequent filing and recording of security documents, Lender shall have, in regard to the Collateral, the liens, security interests and lien priorities described herein.

(n) No representation or warranty made by Borrower under this Agreement and no statement made by it in any financial statement, certificate, report or document furnished by it to Lender pursuant to this Agreement is false or misleading in any material respect (including by omission of material information necessary to make such representation, warranty or statement not misleading).

(o) Borrower has disclosed to Lender in writing, every fact which materially and adversely affects or which so far as it can now foresee, might in the future materially and adversely affect Borrower’s business operations or Borrower’s ability to perform its obligations under this Agreement and the loan documentation referred to herein.

7.2 Covenants of Borrower. Borrower covenants to Lender, which covenants shall survive the execution and delivery of this Agreement, that:

(a) Borrower will remain a corporation in good standing under the laws of the Commonwealth of [REDACTED].

(b) Borrower will adhere to all laws, ordinances, regulations and rules governing the operation of its business and the ownership and usage of the Collateral.

(c) Borrower will make full and timely performance of all its duties and obligations including, but not limited to, the prompt payment when due of any amounts for the Loan arising under any other agreements, contracts, documents, instruments and/or loans between Lender and Borrower, whether executed prior to or concurrent with or subsequent to the execution of this Agreement.

(d) Borrower will duly pay and discharge all taxes, assessments and governmental charges upon it or against any property owned by it, whether real or personal, tangible or intangible, prior to the date upon which penalties are imposed thereon, and unless to the extent only that such taxes shall be contested in good faith and by the appropriate legal proceedings, and it shall maintain a reserve account therefor in accordance with generally accepted accounting principles consistently applied.

(e) Borrower will promptly deliver written notice to Lender of the occurrence of (i) any Event of Default as defined in this Agreement; (ii) the initiation of any litigation, administrative proceeding and/or substantial dispute materially affecting it or its assets and/or its financial condition except worker’s compensation claims for which there is adequate worker’s compensation insurance coverage; and/or (iii) any other event or matter which has resulted or may result in a material adverse change in its financial condition and/or its assets.

(f) Borrower will maintain the Collateral in good repair.

7

7.3 Negative Covenants of Borrower. Borrower covenants with Lender, which covenants shall survive the execution and delivery of this Agreement, that it will not without the prior written consent of Lender:

(a) Voluntarily or involuntarily cause or permit the placing of any lien, encumbrance, attachment, levy or other legal process against the Collateral other than in favor of [REDACTED].

(b) Sell, pledge, assign or otherwise dispose of any of its assets other than in the normal course of its business, or to [REDACTED].

(c) Create, incur, assume, suffer or permit to exist any indebtedness for borrowed money from any source other than Lender and [REDACTED].

(d) Permit or suffer to occur any change in the present ownership or control of Borrower from that which was disclosed to Lender on the date of this Agreement, except for any sale of certain assets of the [REDACTED].

(e) Make any loans or advances of money, credit or property to any other person or persons, entity or entities or invest in by capital contribution, loan, purchase or otherwise, any firm, corporation or person.

(f) Borrower will not make capital expenditures in excess of Two Hundred Thousand Dollars ($200,000.00), annually.

(g) Borrower will not make shareholder advances, loans, dividends or distributions or permit any withdrawals of any nature to its shareholders.

(h) Become or remain liable directly or indirectly in connection with the obligations, liabilities or duties of any person, firm, corporation or other entity, whether by guaranty, endorsement, agreement to supply or advance funds, agreement to maintain working capital or net worth, agreement to purchase or repurchase goods or services, whether or not such goods or services are actually acquired or otherwise, except that Borrower may endorse negotiable instruments for collection in the ordinary course of its business.

(i) Materially violate or fail to comply with any law, ordinance regulation, or legal requirement which would materially impair Borrower’s ability to comply with the terms and provisions of this Agreement, applicable to the Borrower, the Collateral and/or the operation of Borrower’s business.

(j) Enter into any merger, acquisition, consolidation or other corporate reorganization or other change in corporate structure.

(k) Make or permit to be made any material change in the nature, character or conduct of its business or discontinue or permit the discontinuance of its business as conducted on the date of this Agreement, except for the sale of the [REDACTED].

8

ARTICLE VIII. OTHER CONDITIONS PRECEDENT TO CLOSING ON THE LOAN

8.1 Landlord’s Waiver. Borrower, at its expense, shall cause to be delivered to Lender landlord’s waivers executed by the landlord or landlords of every premises occupied by Borrower as a tenant for the operation of its business (the “Landlord’s Waivers”).

8.2 Lien Searches. Lender, at Borrower’s expense, shall procure lien searches for the purpose of determining that the Collateral is free and clear of all liens and encumbrances as represented by Borrower to Lender in this Agreement and the loan documentation.

8.3 Payment of Commitment Fee, Expenses and Legal Fees Related to the Transaction Evidenced by this Agreement. Borrower shall pay to Lender, at the closing on the Loan, a commitment fee in the amount of Five Thousand Dollars ($5,000.00). Borrower shall pay all premiums for the insurance policies, all filing and recording fees for loan documentation referred to in this Agreement, and Lender’s counsel fees.

ARTICLE IX. DOCUMENTATION

9.1 Delivery of Documentation. Prior to the date of this Agreement, Borrower shall deliver or cause to be delivered to Lender, the following:

(a) Financial statements of Borrower.

(b) Certified copies of Borrower’s Articles of Incorporation and Bylaws.

(c) Evidence that all corporate action required to be taken by Borrower including, but not limited to, resolutions and unanimous consents has occurred as of the date of this Agreement.

(d) Subsistence Certificate for Borrower.

(e) Incumbency and signature certificate for Borrower dated within ten (10) days of the date of this Agreement.

(f) Evidence of Insurance Coverage.

(g) Landlord’s Waivers.

(h) Lien Searches.

9.2 Delivery of Loan Documentation. On the date of this Agreement, Borrower shall deliver or cause to be delivered to Lender the following loan documents:

(a) This Agreement.

(b) The Notes.

(c) Financing Statements.

9

(d) The Suretyships.

(e) The Mortgages.

(f) The Subordination Agreement.

ARTICLE X. DEFAULTS, UNCURED DEFAULTS AND REMEDIES.

10.1 Events of Default. An Event of Default is defined in this Agreement as:

(a) Failure of Borrower to pay any principal or interest on the Loan when due.

(b) Failure of Borrower to perform, keep and observe any covenant, condition, term or provision contained in this Agreement, the loan documentation referred to herein or in any other agreement, contract, instrument and/or loan documentation between Lender and Borrower.

(c) Any act of voluntary or involuntary bankruptcy, receivership, or reorganization of the affairs of Borrower which is not withdrawn or caused to be withdrawn within sixty (60) days of the date of such filing or occurrence.

(d) Failure by Borrower to fully perform, keep and observe any other material covenant, condition, term or provision under any agreement to which Borrower is a party with any other person or entity which, in the sole opinion of Lender, would have a material adverse effect on the financial condition of Borrower.

(e) Any misrepresentation on the part of Borrower under this Agreement or any loan documentation referred to in this Agreement or any materially incorrect or false written report or certification given or to be given by Borrower to Lender.

(f) Any materially erroneous or false financial statement made, given previously or to be given in the future by the Borrower to Lender.

10.2 Uncured Event of Default. An Uncured Event of Default is defined in this Agreement as:

(a) An Event of Default as set forth in subparagraphs (a), (b), and (d) of the preceding paragraph which Borrower has not cured or caused to be cured within fifteen (15) days after written notice is given by Lender to Borrower to cure or cause to be cured such Event of Default.

(b) An Event of Default as set forth in subparagraphs (e) and (f) of the preceding paragraph for which there is no cure period given.

10.3 Rights and Remedies Upon the Happening of an Uncured Event of Default. Upon the happening of an Uncured Event of Default, Lender shall have the following rights and remedies which may be exercised consecutively, concurrently, cumulatively and as many times as necessary for the payment to Lender of the unpaid principal balance and interest under the

10

Loan and payment of all principal and interest under any other obligation then owing, whether matured or unmatured, by Borrower to Lender:

(a) The right to accelerate the entire unpaid principal balance of all of the Loan and any other indebtedness, whether matured or unmatured, owing by Borrower to Lender and demand immediate payment thereof plus interest thereon.

(b) Exercise any right it maintains in this Agreement or any loan documentation referred to herein given to Lender including the right to increase the interest rate charged on any of the Loan to Lender’s Prime Rate above the highest interest rate then applicable under the Notes (the “Default Interest Rate”).

(c) The right, through its agents, employees or representatives and without obtaining the consent of Borrower, to go upon any premises owned by Borrower or leased by Borrower in which assets of Borrower are located and in which assets Lender maintains a security interest, to assemble such assets and repossess and remove the same from any such premises.

(d) Any right which it may have under any statute, in law or in equity.

ARTICLE XI. MISCELLANEOUS

11.1 Inspection and Field Audits by Lender. Borrower shall, at all times, without hindrance or delay, and during business hours and absent an Event of Default, with twenty-four (24) hours prior notice, permit any agent of Lender to inspect, audit or check or make abstracts from the books, records, receipts, correspondence, memoranda, or other papers and data, including computer data, relating to Borrower’s business and to generally audit all books and records of Borrower. The expense of such inspections or field audits shall be paid by Borrower. No notice is required from Lender when there has occurred an Event of Default as defined in this Agreement in which case, Lender shall immediately have the rights granted to Lender by Borrower in this Section 10.1 of the Agreement.

11.2 Late charges. If Borrower fails to pay any principal or interest payment on any of the Loan within fifteen (15) days of the due date of such payment, Lender may impose a late charge equal to five percent (5%) of the late payment.

11.3 Calculation of interest. The interest to be charged by Lender to Borrower under this Agreement shall be calculated for the actual number of days the unpaid principal balance of the Loan was outstanding based upon a three hundred sixty (360) day year.

11.4 Continuation of interest. The interest rate to be charged on the Loan shall continue as stated herein notwithstanding the maturity or acceleration of the repayment of the principal of the Loan or the entry of any judgment against Borrower under any instrument given by Borrower to Lender for the Loan or arising out of any action brought by Lender for collection of the Loan subject to Section 9.3 (b) of this Agreement.

11.5 Set-off. Upon the occurrence of an Uncured Event of Default, Lender shall have the right to set-off any monies or property of Borrower in Lender’s possession immediately

11

without prior written notice to Borrower. However, Lender shall provide Borrower with prompt notice (either verbally or written) of the exercise of its right of set-off pursuant to this Agreement.

11.6 Payment of Fees and Costs. On the date of this Agreement, Borrower shall pay fees and costs related to the transactions evidenced by this Agreement including, but not limited to, attorney’s fees of Lender’s counsel.

11.7 Lender’s Waiver. Any waiver by Lender in the enforcement of any condition, covenant, provision or term contained in this Agreement or under any loan documentation referred to in this Agreement upon an Event of Default or Uncured Event of Default shall not waive Lender’s future rights to enforce any condition, covenant, provision or term hereunder or under said loan documentation upon the subsequent Event of Default or Uncured Event of Default.

11.8 Understandings of the Parties. This Agreement and the loan documentation referred to in this Agreement are the complete understandings between Lender and Borrower relating to the transactions referred to in this Agreement. Any amendment to this Agreement or any loan documentation referred to in this Agreement must be executed in writing by Lender and Borrower.

11.9 Notices. Any notice required hereunder shall be deemed made when sent postpaid, certified mail, return receipt requested to the following:

Lender:

Comdial Corporation

106 Cattlemen Road

Sarasota, FL 34232

Attention: Kenneth Clinebell, Chief Financial Officer

Borrower:

[REDACTED]

[REDACTED]

[REDACTED]

[REDACTED]

[REDACTED]

11.10 Background Section. The Background section of this Agreement is incorporated into the body of this Agreement by reference.

12

11.11 Headings. Any paragraph heading in this Agreement is for reference purposes only and shall not connote any meaning to this Agreement.

11.12 Incorporation of Documentation. All documentation referred to in this Agreement is incorporated herein by reference and this Agreement is incorporated by reference into all documentation referred to herein.

11.13 Nonassignability of this Agreement. Borrower shall not assign this Agreement or any portion thereof to any person or entity.

11.14 Severance. If any provision of this Agreement or any loan documentation referred to in this Agreement would be declared invalid, unenforceable or unconstitutional by any court of competent jurisdiction, then such provision shall be deleted herefrom or therefrom and all other provisions of this Agreement or any loan documentation referred to in this Agreement shall remain in effect.

11.15 Waiver of Jury Trial. Borrower hereby waives any and all right it may have to a trial by jury in any action, proceeding, counterclaim or other litigation whatsoever arising directly or indirectly out of or in any way connected with this Agreement or any loan documentation referred to herein or the relationship created thereby.

11.16 Governing law. This Agreement and all loan documentation referred to in this Agreement shall be governed by and interpreted under the laws, but not the conflict of laws, of the State of New York.

11.17 Forum. Any litigation arising from this Agreement or any documentation referred to in this Agreement shall be commenced only in the State of New York.

IN WITNESS WHEREOF and intending to legally bind themselves, their successors and assigns, Lender and Borrower have executed this Agreement the day and year first above written.

COMDIAL CORPORATION

By:

Name: Kenneth Clinebell

Title: Chief Financial Officer

[REDACTED] CORPORATION

By:

Name: [REDACTED]

Title: President

Attest:

Name:

Title:

13

EX-10.32

Exhibit 10.32

COMDIAL CORPORATION

TERM LOAN NOTE

$800,000.00	October 1, 2004
	[REDACTED]

FOR VALUE RECEIVED, [REDACTED], a [REDACTED] corporation (the “Borrower”) promises to pay to the order of COMDIAL CORPORATION, maintaining an office at 106 Cattlemen Road, Sarasota, Florida 34232 (“Lender”) or at such other office or at such other place as Lender may designate in writing, the principal sum of Eight Hundred Thousand Dollars ($800,000.00), in lawful money of the United States of America, together with interest from the date hereof at the rates specified below, payable as more fully provided below.

INTEREST RATE — The interest rate charged by Lender to Borrower on this Note is a fixed rate equal to eight percent (8%) per annum.

All interest shall be calculated on the basis of the actual number of days in the current calendar year, divided by 360.

PAYMENT OF PRINCIPAL AND INTEREST — Beginning on November 1, 2004 and continuing on the first day of each successive month thereafter, Borrower shall repay principal and pay interest to Lender as follows: (i) eleven (11) consecutive monthly interest only payments in the amount of Five Thousand Three Hundred and Thirty Three Dollars ($5,333.00) each; and (ii) a final payment in the amount of the entire unpaid principal balance plus interest due on this Note on or before September 30, 2005. The maturity date for this Note is September 30, 2005 (the “Maturity Date”).

PREPAYMENT — Borrower may prepay this Note at any time without premium or penalty.

DEFINITIONS —

The term “Agreement” means the Business Loan and Security Agreement between Lender and Borrower also dated September                 , 2004.

The term “Collateral” includes all real and personal property of any Obligor (as hereinafter defined) now or hereafter pledged, mortgaged, assigned or granted to Lender to secure payment of this Note.

The term “Liabilities” includes: (a) all amounts at any time owing under this Note (including any past, present or future advances or re-advances and all substitutions, extensions, renewals and modifications hereof and all interest, late charges, penalties and fees of any and all types owing or payable hereunder); (b) all costs and expenses incurred by Lender in the collection or enforcement of this Note; and (c) all future advances made by Lender for taxes, levies, insurance, and repairs to or maintenance of the Collateral.

The term “Obligor” means Borrower, each surety or guarantor of this Note, and any other person or entity which has granted or in the future grants to Lender a security interest in, or lien upon, property to secure this Note.

COLLATERAL; INCORPORATION OF SECURITY DOCUMENTS RIGHTS AND REMEDIES — The Collateral shall secure payment to Lender of any and all amounts due under this Note. Borrower hereby grants or confirms the grant to Lender of a security interest in, lien upon, and right to setoff against the Collateral. The holder of this Note shall be entitled to all rights, remedies and benefits of any mortgages and other security documents and instruments executed and delivered to Lender with respect to the Collateral (the “Collateral Documents”), and all Collateral Documents are incorporated in this Note by reference.

EVENTS OF DEFAULT AND UNCURED EVENTS OF DEFAULT — The occurrence of an Event of Default as defined in the Agreement and the occurrence of an Uncured Event of Default as defined in the Agreement shall constitute an “Event of Default” under this Note and an “Uncured Event of Default” under this Note.

ATTORNEYS’ FEES; EXPENSES — Borrower also agrees to pay to Lender, upon demand at any time, all costs and expenses (including reasonable attorneys’ fees and legal expenses) incurred by Lender in the enforcement of Borrower’s liabilities to Lender under this Note.

ACCELERATION; RIGHTS OF LENDER – (a) Upon the occurrence of any Uncured Event of Default, Lender shall have the option to declare to be immediately due and payable the principal and interest accrued on this Note and any and all other Liabilities. Whether or not it elects to accelerate the Liabilities, Lender may set off accounts and may exercise any rights and remedies against any Obligor or the Collateral as may be available to Lender under this Note, the Agreement, the Collateral Documents, the Uniform Commercial Code or other applicable law. Setoff shall be deemed to have occurred immediately after any default in payment whether or not any book or accounting entry shall have been made. After the occurrence of an Uncured Event of Default or maturity, whether by acceleration or otherwise, interest shall accrue, at the option of Lender at a rate of three percent (3%) per annum above the interest rate then applicable under this Note (the “Note Rate”) until all amounts due under this Note are paid. Interest shall continue to accrue after entry of judgment by confession or otherwise at a rate of three percent (3%) per annum above the Note Rate until all amounts due under this Note and under any judgment are paid. Lender reserves the right to proceed against any Obligor and to apply proceeds of Collateral to amounts due under this Note or to any other Liabilities in such amounts and in such order as Lender may in its sole discretion determine.

(b) Upon the failure by Borrower to effectuate the sale of the [REDACTED] (as defined in the Agreement) in accordance with the provisions of Section 3.1 of the Agreement, Interest shall accrue at a rate of 24% until all amounts due under this Note are paid.

MISCELLANEOUS — (a) Except as provided elsewhere in this Note, in the Agreement or in any of the Collateral Documents, Borrower hereby waives presentment for payment, notice of demand, notice of nonpayment or dishonor, protest, notice of protest, and all other notices in connection with the delivery, acceptance, performance or enforcement of payment of this Note; (b) Notwithstanding any other provision of this Note, at no time shall Borrower be obligated to pay interest hereunder at a rate which is in excess of the maximum rate permitted by law, and if, by the terms of this Note, Borrower is at any time obligated to pay interest in excess of such maximum rate, the rate of interest hereunder shall be deemed immediately reduced to such maximum rate of interest; (c) If any provision of this Note is for any reason held invalid or unenforceable, no other provision shall be affected thereby, and this Note shall be construed as if the invalid or unenforceable provision had never been a part of it; (d) The duties of Borrower shall be binding on Borrower and all receivers, trustees, successors and assigns of Borrower, and each general partner of Borrower shall be bound hereby both in such general partner’s individual and partnership capacities; (e) This Note shall in all respects be governed by and construed in accordance with the laws of the [REDACTED] without reference to choice of law principles; and (f) So

2

long as Lender is the holder hereof, Lender’s books and records shall be presumed (except in the case of manifest error) to accurately evidence at all times all amounts due under this Note and the date and amount of all payments made pursuant hereto.

The following paragraph sets forth a warrant of attorney to confess judgment against Borrower. In granting this warrant of attorney to confess judgment against Borrower, Borrower hereby knowingly, intentionally, voluntarily, and, with opportunity for advice of separate counsel, unconditionally waives any and all rights Borrower has or may have to prior notice and an opportunity for hearing under the respective constitutions and laws of the United States and the [REDACTED].

CONFESSION OF JUDGMENT — BORROWER HEREBY AUTHORIZES AND EMPOWERS IRREVOCABLY THE PROTHONOTARY OR ANY CLERK OR ATTORNEY OF ANY COURT OF RECORD TO APPEAR AND TO CONFESS JUDGMENT AGAINST BORROWER IN FAVOR OF THE HOLDER OF THIS NOTE AT ANY TIME AFTER DEMAND AND AFTER THE EXPIRATION OF ANY APPLICABLE CURE PERIODS AS PROVIDED FOR IN THE AGREEMENT, AS OFTEN AS NECESSARY UNTIL ALL LIABILITIES HAVE BEEN PAID IN FULL, AS OF ANY TERM, FOR ALL AMOUNTS OWING (WHETHER OR NOT THEN DUE) UNDER THIS NOTE, TOGETHER WITH COSTS OF LEGAL PROCEEDINGS AND A REASONABLE ATTORNEYS’ FEE FOR COLLECTION WITH RELEASE OF ALL ERRORS, WAIVER OF APPEALS, AND WITHOUT STAY OF EXECUTION. BORROWER HEREBY WAIVES ALL RELIEF FROM ANY AND ALL APPRAISEMENT, STAY OR EXEMPTION LAWS OR RULES OF COURT NOW OR HEREAFTER IN EFFECT.

Signatures

Witness the due execution of this Note on the day and year first above written.

[REDACTED] CORPORATION
By:
	Name: [REDACTED]
	Title: President

Attest:

Name:

Title:

3

EX-10.33

Exhibit 10.33

WARRANT TO PURCHASE COMMON STOCK

OF

[REDACTED]

Warrant             

This is to Certify That, FOR VALUE RECEIVED, COMDIAL CORPORATION, or assigns (“Holder”), is entitled to purchase, subject to the provisions of this Warrant, from [REDACTED], a [REDACTED] corporation (the “Company”), Two Hundred and Sixty Three (263) fully paid, validly issued and nonassessable shares of Series A Common Stock of the Company (“Common Stock”) at a price of $.01 per share at any time or from time to time on or after October 5, 2004 (the “Exercise Date”). The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as “Warrant Shares” and the exercise price of a share Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the “Exercise Price.”

(a) EXERCISE OF WARRANT.

(1) This Warrant may be exercised in whole or in part at any time or from time to time on or after the Exercise Date; provided, however, that (i) if such day is a day on which banking institutions in the State of New York are authorized by law to close, then on the next succeeding day which shall not be such a day, and (ii) in the event of any merger, consolidation or sale of substantially all the assets of the Company as an entirety, resulting in any distribution to the Company’s stockholders, the Holder shall have the right to exercise this Warrant into the kind and amount of shares of stock and other securities and property (including cash) receivable by a holder of the number of shares of Common Stock into which this Warrant might have been exercisable immediately prior thereto. This Warrant may be exercised by presentation and surrender hereof to the Company at its principal office with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such form. As soon as practicable after each such exercise of this Warrant, following the receipt of good and available funds, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee and bearing a restrictive legend substantially similar to the one set forth on the front page of this Warrant. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. As of the end of business on the date of receipt by the Company of this Warrant at its office in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares shall not then be physically delivered to the Holder.

(b) RESERVATION OF SHARES. The Company shall at all times reserve for issuance and/or delivery upon exercise of the Warrants such number of shares of Common Stock as shall be required for issuance and delivery upon exercise of the Warrants.

(c) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. Upon surrender of this Warrant to the Company at its principal office or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed by the Holder and funds sufficient to pay any transfer tax delivered by the Holder, the Company shall, without charge, subject to the Holder’s compliance with the restrictive legend set forth on the front page of this Warrant, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be cancelled. This Warrant may be divided or combined with other warrants that carry the same rights upon presentation hereof at the principal office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the denominations in which new warrants are to be issued to the Holder and signed by the Holder hereof. The term “Warrants” as used herein includes any warrants into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone.

(d) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein.

(e) ADJUSTMENT PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time upon the happening of certain events as follows:

(1) In case the Company shall hereafter (i) declare a dividend or make a distribution on its outstanding Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur.

(2) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Subsection (1), the number of Warrant Shares purchasable upon exercise of this Warrant shall simultaneously be adjusted to the number of Warrant Shares resulting from multiplying the number of Warrant Shares initially issuable upon exercise of this Warrant by the

2

Exercise Price in effect immediately prior to such adjustment and dividing the product so obtained by the Exercise Price, as adjusted.

(3) In the event that at any time, as a result of an adjustment similar to any adjustment made pursuant to Subsection (1) above, the Holder of this Warrant thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsection (1) above.

(4) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of this Warrant, Warrants theretofore issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Warrant.

(f) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i) if the Company shall pay any dividend or make any distribution upon the Common Stock or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then in any such case, the Company shall cause to be mailed by certified mail to the Holder, at least fifteen days prior the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up.

(g) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding Common Stock of the Company, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding Common Stock of the class issuable upon exercise of this Warrant) or in case of any sale, lease or conveyance to another corporation of the property of the Company as an entirety, the Company shall, as a condition precedent to such transaction and to the extent reasonably deemed necessary, cause effective provisions to be made so that the Holder shall have the right thereafter by exercising this Warrant at any time prior to the expiration of the Warrant, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of this Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments

3

provided for in this Warrant. The foregoing provisions of this Section (h) shall similarly apply to successive reclassifications, capital reorganizations and changes of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for a security of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Subsection (1) of Section (f) hereof.

(h) MODIFICATION OF AGREEMENT. The provisions of this Warrant may from time to time be amended, modified or waived, if such amendment, modification or waiver is applicable to all of the Warrants and is in writing and consented to by the Company and the holders of at least a majority of the outstanding Warrants and Warrant Shares and such amendment, modification or waiver shall be binding upon the holder of this Warrant (and any assignee thereof) regardless of whether the holder consented to such amendment, modification or waiver; provided that nothing shall prevent the Company and a Registered Holder from consenting to modifications to this Warrant which affect or are applicable to such Registered Holder only.

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name by its duly authorized officer.

[REDACTED]

By:

Dated: October 1, 2004

4

PURCHASE FORM

Dated                     

(1) The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing                  shares of Common Stock of [REDACTED] (or such number of shares of Common Stock or other securities or property to which the undersigned is entitled in lieu thereof or in addition thereto under the provisions of the Warrant).

(2) The undersigned elects to exercise the within Warrant on a cashless basis pursuant to the provisions of Section (a)(2) of the Warrant by checking below:

             check if cashless exercise; or

(3) The undersigned encloses herewith a bank draft, certified check or money order payable to the Company in payment of the exercise price determined under, and on the terms specified in, the Warrant.

(4) The undersigned hereby irrevocably directs that the said shares be issued and delivered as follows:

Name(s) in Full	Address(es)	Number of Shares	S.S. or IRS #
_____________________	_____________________	_____________________	_____________________
_____________________	_____________________	_____________________	_____________________

Signature of Subscriber

Print Name

5

ASSIGNMENT FORM

FOR VALUE RECEIVED,                                                       hereby sells, assigns and transfers unto

Name                                                              

(Please typewrite or print in block letters)

Address                                                          

the right to purchase Common Stock represented by this Warrant to the extent of          shares as to which such right is exercisable and does hereby irrevocably constitute and appoint                      Attorney, to transfer the same on the books of the Company with full power of substitution in the premises.

Date                                                              

Signature                                                              

6

EX-10.34

Exhibit 10.34

SUBORDINATION AGREEMENT

THIS SUBORDINATION AGREEMENT (“Agreement”) is entered into as of the 30th day of September, 2004, by and among [REDACTED] CORPORATION, a [REDACTED] corporation (the “Borrower”); COMDIAL CORPORATION (the “Creditor”); and AFFINITY BANK OF [REDACTED] (the “Bank”).

BACKGROUND

A. The Bank and the Borrower are parties to a loan agreement dated as of the date hereof (as may be amended, supplemented or otherwise modified from time to time, the “Loan Agreement”). Capitalized terms used herein without definition shall have the meanings given in the Loan Agreement.

B. Pursuant to the terms and provisions of the Loan Agreement, the Bank has extended credit to the Borrower in the form of a Term Loan in the original principal amount of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00), and a Line of Credit Loan in the original principal amount of Four Hundred Thousand and 00/100 Dollars ($400,000.00) (individually and collectively, the “Loans”).

C. The Creditor has extended or shall extend to the Borrower certain extensions of credit in the form of an Eight Hundred Thousand and 00/100 Dollar ($800,000.00) loan (any loan and/or security documents, agreements instruments, notes, or judgments evidencing any claim and/or security of the Creditor against the Borrower, collectively, the “Creditor Documents”).

D. The Bank and the Creditor desire to set forth their respective rights and obligations with respect to the Borrower under the Loan Agreement, the Creditor Documents, and the other Loan Documents.

NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Definitions.

“Obligations” means all liabilities, obligations, covenants and duties of the Borrower under the Loans; and all Obligations as defined in the Loan Agreement, including, in each case, any interest or other amounts accruing or arising subsequent to the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Borrower whether or not such interest or other amount is allowed as a claim in any such case, proceeding or other action.

“Collateral” means any collateral now or in the future securing the Obligations.

“Subordinated Debt” means any loans, advances, fees, debts, liabilities, obligations, seller financing, covenants and duties owing by the Borrower to the Creditor of any kind or

nature, present or future, whether or not evidenced by any note, guaranty, real estate agreement of sale, or other instrument, whether arising under any agreement, instrument or document, by reason of an extension of credit, real estate sale, loan or guarantee, whether direct or indirect, absolute or contingent, joint or several, due or to become due, now existing or hereafter arising (including any such obligations purchased or otherwise acquired by the Creditor), whether consisting of principal, interest, expense payments, attorneys’ fees and costs whether arising or created pursuant to the Creditor Documents or otherwise, including, without limitation, that certain obligation in the original principal amount of $800,000.00. Notwithstanding the above, or any other provision in this Agreement, Subordinated Debt shall not include any obligations or payments made in the ordinary course of business between the Borrower and the Creditor.

2. Subordination.

(a) Subject to Section 3 hereof, the Creditor hereby irrevocably subordinates and postpones the payment of and the time of any principal loan payment, and lien priority, of all the Subordinated Debt and all claims, judgments, liens and demands arising therefrom, to the Obligations and all mortgages, judgments, liens and/or encumbrances securing the Obligations, and directs that the Obligations be paid in full before the Subordinated Debt. Notwithstanding the above, or any other provision in this Agreement, the Bank consents to the Borrower making current interest only payments to the Creditor on the Subordinated Debt under the terms of the Creditor Documents, but not prepayment of interest to the Creditor, for the term of the Subordinated Debt ending no later than September 30, 2005, so long as the Borrower is not in default under the Loans.

(b) The Creditor shall: (i) make notations in the Creditor Documents and on the books of the Creditor beside all accounts or on such other statements evidencing or recording any Subordinated Debt to the effect that such Subordinated Debt is subject to the provisions of this Agreement; (ii) furnish the Bank, upon the Bank’s reasonable request from time to time, a statement of the account between the Creditor and the Borrower representing the Subordinated Debt and copies of the Creditor Documents; and (iii) give the Bank, upon its reasonable request, full and free access to the Creditor’s books pertaining only to such accounts with the right to make copies thereof. Each and every Creditor Document shall bear a legend as set forth in Section 11(c) hereof.

3. Security. The Borrower shall not, without the prior written consent of the Bank, grant to the Creditor, and the Creditor shall not take any lien on, or security interest in, any of the Borrower’s property, now owned or hereafter acquired or created, except for such property set forth in the Creditor Documents on or before the effective date of this Agreement.

4. Standby Limitation. Notwithstanding any breach or default by the Borrower under the Creditor Documents, the Creditor shall not at any time or in any manner: (a) proceed in any way to enforce any claims he has or may have against the Borrower under the Subordinated Debt or otherwise, or (b) contest, protest or object to any action taken by the Bank under the Loan Agreement, the Loan Documents or otherwise, unless and until the Obligations have been fully and indefeasibly paid and satisfied in full.

5. Bankruptcy of Borrower. In the event a petition or action for relief shall be filed by or against the Borrower under any federal bankruptcy statute in effect from time to time, or under any other law relating to bankruptcy, insolvency, reorganization, receivership, general assignment for the benefit of creditors, moratorium, creditor composition, arrangement or other relief for debtors, the Bank’s claims (secured or unsecured) against the assets or estate of the Borrower for repayment of the Obligations shall be indefeasibly paid in full before any payment is made to the Creditor on the Subordinated Debt, whether such payment is in cash, securities or any other form of property or rights. The Bank may, in its discretion, file a proof of claim for or collect the Creditor’s claims first for the benefit of the Bank, to the extent of the unpaid Obligations and then for the benefit of the Creditor (but without creating any duty or liability to the Creditor other than to remit to the Creditor distributions, if any, actually received in such proceedings after the Obligations have been paid and satisfied in full) directly from the receiver, trustee, custodian, liquidator or representative of the Borrower’s estate in such proceeding. The Borrower and the Creditor shall furnish all assignments, powers or other documents requested by the Bank to facilitate such direct collection by the Bank.

6. Receipt of Payments by the Creditor. Should the Creditor directly or indirectly receive any principal loan payment or distribution on the Subordinated Debt prohibited by the provisions of this Agreement or any Collateral or proceeds thereof, prior to the full and indefeasible payment and satisfaction of the Obligations between the Bank on the one hand, and the Borrower on the other, such Creditor will deliver the same to the Bank in the form received (except for the endorsement or assignment of the Creditor where necessary), for application to the Obligations in accordance with the Loan Agreement and the Loan Documents. Until so delivered, the Creditor shall hold the same, in trust, for the Bank as property of the Bank, and shall not commingle such property with any other property held by the Creditor. In the event the Creditor fails to make any such endorsement or assignment, the Bank, or any of its officers or employees on behalf of the Bank, is hereby irrevocably authorized in its own name or in the name of the Creditor to make such endorsement or assignment and is hereby irrevocably appointed as the Creditor’s attorney-in-fact for those purposes. Notwithstanding the foregoing, the Creditor may accept, and the Borrower shall be permitted to make, regularly scheduled payments on account of the subordinated indebtedness unless and until there occurs a default or an Event of Default under any of the Creditor Documents.

7. Creditor’s Rights and Authority.

(a) The Creditor hereby consents that at any time and from time to time, without further consent of or notice to the Creditor and without in any manner affecting, impairing, lessening or releasing any of the provisions of this Agreement, the Bank may, in accordance with the terms of the Loan Agreement or the Loan Documents: (i) renew, compromise, extend, expand, postpone, waive, accelerate, terminate, change the payment terms of, or otherwise modify the Obligations or amend, renew, replace or terminate the Loan Agreement or the Loan Documents or any and all other agreements now or hereafter related to the Obligations; (ii) extend credit to the Borrower in whatever amount on a secured or unsecured basis or take other support for the Obligations and exchange, enforce, waive, sell, transfer, collect, adjust or release any such security or other support or any part thereof; (iii) apply any and all payments or proceeds of such security or other support and in any order or manner as the Bank, in its sole

discretion, may determine; and (iv) release or substitute any party liable on the Obligations, any guarantor of the Obligations, or any other party providing support for the Obligations.

(b) This Agreement will not be affected, impaired or released by any delay or failure of the Bank to exercise any of its rights and remedies against the Borrower or any guarantor or under any of the Obligations or against any Collateral, by any failure of the Bank to take steps to perfect or maintain its lien on, or to preserve any rights to, any Collateral by any irregularity, unenforceability or invalidity of any of the Obligations or any part thereof or any security or guarantee therefor, or by any other event or circumstance which otherwise might constitute a defense available to, or a discharge of, the Borrower, the Creditor or any other subordinated creditor. The Creditor hereby waives demand, presentment for performance, protest, notice of dishonor and of protest with respect to the Subordinated Debt and the Collateral, notice of acceptance of this Agreement, notice of the making of any of the Obligations and notice of default under any of the Obligations.

(c) Nothing in this Agreement will obligate the Bank to grant credit to, or continue financing arrangements with, the Borrower.

8. Continuing Agreement. This is a continuing agreement and will remain in full force and effect until all of the Obligations and the Creditor’s obligations and undertakings to the Bank have been fully performed and indefeasibly satisfied and until the Loan Agreement and all of the Loan Documents have been terminated. This Agreement will continue to be effective or will be automatically reinstated, as the case may be, if at any time payment of all or any part of the Obligations is rescinded or must otherwise be returned by the Bank upon insolvency, bankruptcy, or reorganization of the Borrower or otherwise, all as though such payment had not been made.

9. No Challenge to Liens. The Creditor agrees that it will not make any assertion, claim or argument in any action, suit or proceeding of any nature whatsoever in any way challenging the priority, validity or effectiveness of the liens and security interests granted to the Bank.

10. Order of Proceedings. Nothing in this Agreement is intended to compel the Bank or the Creditor at any time to declare the Borrower in default or compel the Bank to proceed against or refrain from proceeding against any Collateral in any order or manner. All rights and remedies of the Bank with respect to the Collateral, the Borrower, and any other obligors concerning the Obligations are cumulative and not alternative.

11. Replacement Financing; Assignment of Subordinated Debt.

(a) The provisions hereof shall inure to the benefit of any financial institution obtained by the Borrower or the Bank to provide replacement, working capital, or other financing for the Borrower in place of the Bank, as the case may be, regardless of whether any such replacement lender provides its own financing or succeeds to the Bank’s financing by assignment. If requested by such replacement lender, the Creditor shall execute with such replacement lender a subordination agreement substantially similar to this Agreement.

(b) The Creditor also agrees that as a prior condition of any assignment of any of his interests under any of the Creditor Documents, the Creditor shall require the assignee to acknowledge this Agreement and agree, in writing, to be bound by the terms and conditions hereof.

(c) Each and every Creditor Document, and/or pleadings entering judgment thereon, shall bear the following legend, or a similar legend acceptable to Bank, in boldface type:

This document or instrument is subject to the terms of a Subordination Agreement in favor of Affinity Bank of [REDACTED] its successors and assigns. Notwithstanding any contrary statement contained in the within instrument, no payment on account of any obligation arising from or in connection with the within instrument or any related agreement (whether of principal, interest or otherwise) shall be made, paid, received or accepted except in accordance with the terms of said Subordination Agreement.

12. Financing of Fiduciary. In the event of a bankruptcy, reorganization, other insolvency or court proceeding for the Borrower, the Bank shall have the option (in its sole and absolute discretion) to continue to provide financing (on terms acceptable to the Bank) of the trustee, other fiduciary, or of the Borrower as a debtor-in-possession, if the Bank, deems such financing to be in its best interests. The subordination and lien priority provisions of this Agreement shall continue to apply to all advances made during the pendency of such court proceedings, so that the Bank shall have a prior lien on all Collateral, created before or during such court proceeding, to secure all Obligations, whether created before or during such court proceeding. The Creditor hereby waives any right he may have to object to financing by the Bank during the pendency of such court proceeding and the Creditor’s consent to such financing shall not be required regardless of whether the court supervising such proceeding approves, grants or allows adequate protection to the Creditor.

13. Investigation of Parties. The Creditor has entered into the Creditor Documents with the Borrower, and the Bank has entered into the Loan Agreement and Loan Documents with the Borrower, and the Creditor and the Bank have entered into this Agreement, each upon its own independent investigation, and each makes no warranty or representation as to each other with respect to the financial condition of the Borrower, or its ability to repay its loans to the Creditor or the Bank in the future. Nothing in this Agreement shall be deemed to constitute this Agreement as a security or create a joint venture or partnership between the Creditor and the Bank for any purpose.

14. Improper Action by Creditor. If the Creditor or the Borrower, contrary to this Agreement, makes, attempts to or threatens to allow the Creditor to exercise his remedies against the Borrower under the Creditor Documents, or makes any principal loan payment or takes any action contrary to this Agreement, the Bank may restrain or enjoin the Creditor and the Borrower from so doing, it being expressly understood and agreed by the Creditor and the Borrower that: (i) the Bank’s damages from their actions may at that time be difficult to ascertain and may be irreparable, and (ii) the Creditor and the Borrower waive any defense or claim that the Bank cannot demonstrate damages or can be made whole by the awarding of damages.

15. Indemnification of the Bank. The Creditor agrees to indemnify and to hold the Bank, its officers, directors, agents and employees harmless for any and all losses, damages, liabilities, expenses and obligations, including reasonable attorneys’ fees and expenses, as they arise, relating to actions of the Creditor taken contrary to this Agreement.

16. Scope of this Agreement. The terms of this Agreement relate solely to the Creditor’s rights under the Creditor Documents and the Subordinated Debt and shall not limit, impair, or otherwise affect any other rights, duties or obligations of the Creditor with respect to the Borrower, including without limitation, the Creditor’s rights, duties and obligations as a member, officer, employee or agent of the Borrower.

17. Notices. All notices, demands, requests, consents, approvals and other communications required or permitted hereunder must be in writing and will be effective upon receipt. Such notices and other communications may be hand-delivered, sent by facsimile transmission with confirmation of delivery with a copy sent by first-class mail, or sent by nationally recognized overnight courier service, to a party’s address set forth below or to such other address as any party may give to the other in writing for such purpose:

To the Bank:	[REDACTED]
	[REDACTED]
	[REDACTED]
	[REDACTED]
	Attention: [REDACTED]
To the Creditor:	Comdial Corporation
	106 Cattlemen Road
	Sarasota, FL 34232
	Attention: Mr. Ken Clinebell, Chief Operating Officer and Chief Financial Officer
To the Borrower:	[REDACTED]
	[REDACTED]
	[REDACTED]
	[REDACTED]
	Attention: [REDACTED], President

18. Preservation of Rights. No delay or omission on the Bank’s part to exercise any right or power arising hereunder will impair any such right or power or be considered a waiver of any such right or power, nor will the Bank’s action or inaction impair any such right or power. The Bank’s rights and remedies hereunder are cumulative and not exclusive of any other rights or remedies which the Bank may have under other agreements, at law or in equity. Nothing in this Agreement is intended to modify, alter, reduce or impair any rights which the Bank or the Creditor may have against the Borrower under the Loan Agreement and the Loan Documents or the Creditor Documents, respectively, or under any other agreement between them, or any of them, and the Borrower.

19. Illegality. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

20. Changes in Writing. No modification, amendment or waiver of any provision of this Agreement nor consent to any departure by the Borrower or the Creditor therefrom, will be effective unless made in a writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.

21. Entire Agreement. This Agreement (including the documents and instruments referred to herein) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof.

22. Counterparts. This Agreement may be signed in any number of counterpart copies and by the parties hereto on separate counterparts, but all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart. Any party so executing this Agreement by facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the validity of the counterpart executed by facsimile transmission.

23. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Borrower, the Creditor and the Bank and their respective heirs, executors, administrators, successors and assigns; provided, however, that the Borrower may not assign this Agreement in whole or in part without the Bank’s prior written consent and the Bank and the Creditor at any time may assign this Agreement in whole or in part. No claims or rights are intended to be created hereunder for the benefit of the Borrower or any alleged third party beneficiary hereof.

24. Interpretation. In this Agreement, unless the parties otherwise agree in writing, the singular includes the plural and the plural the singular; words importing any gender include the other genders; the word “or” shall be deemed to include “and/or”, the words “including”, “includes” and “include” shall be deemed to be followed by the words “without limitation”; references to articles, sections (or subdivisions of sections) or exhibits are to those of this Agreement unless otherwise indicated; and references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications to such instruments, but only to the extent such amendments and other modifications are not prohibited by the terms of this Agreement. Section headings in this Agreement are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. If this Agreement is executed by more than one party as Borrower or by more than one party as Creditor, the obligations of such persons or entities hereunder will be joint and several.

25. Governing Law and Jurisdiction. This Agreement has been delivered to and accepted by the Bank and will be deemed to be made in the Commonwealth of [REDACTED]. This Agreement will be interpreted and the rights and liabilities of the parties hereto determined

in accordance with the laws of the Commonwealth of [REDACTED], excluding its conflict of laws rules. Borrower and the Creditor hereby irrevocably consent to the exclusive jurisdiction of any state or federal court in the Commonwealth of [REDACTED]; provided that nothing contained in this Agreement will prevent the Bank from bringing any action, enforcing any award or judgment or exercising any rights against the Borrower or the Creditor individually, against any security or against any property of the Borrower within any other county, state or other foreign or domestic jurisdiction. The parties hereto agree that the venue provided above is the most convenient forum for each of the parties. The Borrower and the Creditor waive any objection to venue and any objection based on a more convenient forum in any action instituted under this Agreement.

26. WAIVER OF JURY TRIAL. THE BORROWER, THE CREDITOR AND THE BANK IRREVOCABLY WAIVE ANY AND ALL RIGHT EACH MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE BORROWER, THE CREDITOR AND THE BANK ACKNOWLEDGE THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.

WITNESS the due execution hereof as a document under seal, as of the date first written above.

	CREDITOR:
	COMDIAL CORPORATION
By:
	Name: Ken Clinebell
	Title:	Chief Operating Officer and Chief
		Financial Officer

	BORROWER:
	[REDACTED] CORPORATION
By:
	Name: [REDACTED]
	Title: President

	BANK:
	AFFINITY BANK OF [REDACTED]
By:
	Name: [REDACTED]
	Title: Vice President

COMMONWEALTH OF [REDACTED]	:
	:	ss.
COUNTY OF [REDACTED]	:

On this, the      day of                     , 2004, before me,                                 , the undersigned officer, personally appeared [REDACTED], who acknowledged himself to be the President of [REDACTED] CORPORATION, a [REDACTED] corporation, and that he as such President, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as President.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

Notary Public

My Commission Expires:

COMMONWEALTH OF [REDACTED]	:
	:	ss.
COUNTY OF [REDACTED]	:

On this, the      day of                     , 2004, before me,                                 , the undersigned officer, personally appeared KEN CLINEBELL, who acknowledged himself to be the Chief Financial Officer of COMDIAL CORPORATION, and that he as such Chief Financial Officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as Chief Financial Officer.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

Notary Public

My Commission Expires:

COMMONWEALTH OF [REDACTED]	:
	:	ss.
COUNTY OF [REDACTED]	:

On this, the                  day of                             , 2004, before me, a Notary Public in and for the Commonwealth and County aforesaid, the undersigned officer, personally appeared [REDACTED], who acknowledged himself to be a Vice President of AFFINITY BANK OF [REDACTED], a corporation, and that as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the Corporation by [REDACTED] as Vice President.

IN WITNESS WHEREOF, I have hereunto set my hand and official seal.

Notary Public

EX-10.35

Exhibit 10.35

SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

THIS SECOND AMENDMENT (the “Amendment”) to the Executive Employment Agreement dated December 24, 2003 (the “Employment Agreement”) shall become effective as of [May 1], 2004 (the “Amendment Effective Date”) by and between Neil P. Lichtman, who resides at 30981 Via Errecarte, San Juan Capistrano, CA 92675 (the “Executive”), and Comdial Corporation, a Delaware corporation having offices at 106 Cattlemen Road, Sarasota, Florida 34232 (the “Company”). Capitalized terms used in this Amendment shall have the same meanings set forth in the Employment Agreement.

WHEREAS, the Company and the Executive wish to continue the Executive’s employment with the Company on the terms set forth in the Employment Agreement, as modified below.

NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereby agree as follows:

1. Stock Options. Section 3(c) of the Employment Agreement is hereby amended by adding the following after the last sentence thereof:

“Further, in the event of a termination of the Executive’s employment for any reason other than by the Company For Cause or voluntarily by the Executive without Good Reason, all of the Stock Options that were exercisable as of the date of such termination shall remain exercisable by the Executive (or the Executive’s estate in the case of the Executive’s death, or his legal representative in the case of his incapacity or disability) for a period of ninety (90) days from such termination, but in no event shall any Stock Options be exercisable after expiration of the applicable term thereof. The foregoing shall apply to the Stock Options and any other options to purchase the Company’s stock that are granted during the Term subsequent to the date hereof. Furthermore, the foregoing shall apply notwithstanding any contrary provision in any other agreement between the Company and the Executive, including, any applicable stock option agreement; and to the extent necessary, this provisions shall be construed as an amendment to any such agreement and the parties hereby agree to waive the formalities normally required by such amendment.”

2. Severance. Section 3(d) of the Employment Agreement is hereby deleted in its entirety and replaced with the following:

“(d) Severance Pay and Benefits. If this Agreement is terminated pursuant to Sections 2(b)(i), 2(b)(iii) or 2(b)(iv) of this Agreement, or if the Executive dies during the Term, the Company shall pay the Executive (or the Executive’s heirs or estate, as the case may be), as “Severance Pay,” one (1) times the annual Base Salary in effect at the time of such termination.

At the Company’s sole discretion, such amount may be payable by the Company in accordance with its normal payroll practices, over a period of twelve (12) months (or less), or it may be payable in a lump sum. In all cases, such payments shall be subject to applicable tax and other withholdings. In addition to the foregoing, the Executive shall be entitled to receive the same medical and term life insurance coverage that was in effect at the time of his termination (collectively, “Benefits”) for twelve (12) months following such termination. Such Benefits shall be paid for by the Company, subject to plan terms and conditions that are in effect during such period, including premium contributions to be paid by the Executive and other applicable limitations on such coverage.”

3. Effectiveness. This Amendment shall be deemed effective as of Amendment Effective Date and shall not effect the terms of the Employment Agreement until such date.

4. Miscellaneous.

A. Agreement Amended. Subject to the provisions of this Section 4, this Amendment shall be deemed to be an amendment to the Employment Agreement. All references to the Employment Agreement in any other document, instrument, agreement or writing hereafter shall be deemed to refer to the Employment Agreement as amended hereby.

B. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Executive and the Company and their respective successors and assigns.

C. Governing Law. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the law of the State of Florida, without regard to conflicts of law principles.

IN WITNESS WHEREOF, the parties hereby have executed this agreement as of the date written above.

COMDIAL CORPORATION

By:

Name:

Title:

THE EXECUTIVE

Neil P. Lichtman

2

EXHIBIT C

FORM OF STOCK OPTION AGREEMENT

EXHIBIT D

EXISTING STOCK OPTIONS

EX-10.36

Exhibit 10.36

Silicon Valley Bank

Loan and Security Agreement

Borrower:	Comdial Corporation
Address:	106 Cattlemen Road
	Sarasota, Florida 34232
Date:	April 28, 2004

THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) is entered into on the above date between SILICON VALLEY BANK (“Silicon”), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at 3353 Peachtree Road, NE, Suite M-10, Atlanta, Georgia 30326 and the borrower named above (the “Borrower”), whose chief executive office is located at the above address (“Borrower’s Address”). The Schedule to this Agreement (the “Schedule”) shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.)

1. LOANS.

1.1 Loans. Silicon will make loans to Borrower (the “Loans”) up to the amounts (the “Credit Limit”) shown on the Schedule, provided no Default or Event of Default has occurred and is continuing, and subject to deduction of Reserves for accrued interest and such other Reserves as Silicon deems proper from time to time in its good faith business judgment.

1.2 Interest. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Unpaid interest may, in Silicon’s discretion, be charged to Borrower’s loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Silicon may, in its discretion, charge unpaid interest to Borrower’s Deposit Accounts maintained with Silicon.

1.3 Overadvances. If at any time or for any reason the total of all outstanding Loans and all other monetary Obligations exceeds the Credit Limit (an “Overadvance”), Borrower shall immediately pay the amount of the excess to Silicon, without notice or demand. Without limiting Borrower’s obligation to repay to Silicon the amount of any Overadvance, Borrower agrees to pay Silicon interest on the outstanding amount of any Overadvance, on demand, at the Default Rate.

1.4 Fees. Borrower shall pay Silicon the fees shown on the Schedule, which are in addition to all interest and other sums payable to Silicon and are not refundable.

-1-

Silicon Valley Bank Loan and Security Agreement        

1.5 Loan Requests. To obtain a Loan, Borrower shall make a request to Silicon by facsimile or telephone. Loan requests received after 12:00 Noon (Eastern time) will not be considered by Silicon until the next Business Day. Silicon may rely on any telephone request for a Loan given by a person whom Silicon believes is an authorized representative of Borrower, and Borrower will indemnify Silicon for any loss Silicon suffers as a result of that reliance.

1.6 Letters of Credit. At the request of Borrower, Silicon may, in its good faith business judgment, issue or arrange for the issuance of letters of credit for the account of Borrower, in each case in form and substance satisfactory to Silicon in its sole discretion (collectively, “Letters of Credit”). The aggregate face amount of all Letters of Credit from time to time outstanding shall not exceed the amount shown on the Schedule (the “Letter of Credit Sublimit”), and shall be reserved against Loans which would otherwise be available hereunder, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. Borrower shall pay all bank charges (including charges of Silicon) for the issuance of Letters of Credit, together with such additional fee as Silicon’s letter of credit department shall charge in connection with the issuance of the Letters of Credit. Any payment by Silicon under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made. Each Letter of Credit shall have an expiry date no later than thirty (30) days prior to the Maturity Date. Borrower hereby agrees to indemnify and hold Silicon harmless from any loss, cost, expense, or liability, including payments made by Silicon, expenses, and reasonable attorneys’ fees incurred by Silicon arising out of or in connection with any Letters of Credit. Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guaranteed by Silicon and opened for Borrower’s account or by Silicon’s interpretations of any Letter of Credit issued by Silicon for Borrower’s account, and Borrower understands and agrees that Silicon shall not be liable for any error, negligence, or mistake, whether of omission or commission, provided it follows Borrower’s instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto. Borrower understands that Letters of Credit may require Silicon to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Silicon harmless with respect to any loss, cost, expense, or liability incurred by Silicon under any Letter of Credit as a result of Silicon’s indemnification of any such issuing bank. The provisions of this Loan Agreement, as it pertains to Letters of Credit, and any other Loan Documents relating to Letters of Credit are cumulative

1.7 Cash Management Services. Borrower may use up to One Hundred Fifty Thousand Dollars ($150,000) of the Loans for Silicon’s Cash Management Services (as hereinafter defined), which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in various cash management services agreements related to such services (collectively, the “Cash Management Services”). The aggregate face amount of all Cash Management Services from time to time outstanding shall not exceed the amount shown on the Schedule, and shall be resserved against Loans which would otherwise be available hereunder, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silcon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. Any amounts Silicon pays on behalf of Borrower or any amounts that are not paid by Borrower for any Cash Management Services will be treated as Loans and will accrue interest at the rate provided for herein.

2. SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to Silicon a security interest in all of the following (collectively, the “Collateral”): all right, title and interest of Borrower in and to all of the following, whether now owned

-2-

Silicon Valley Bank Loan and Security Agreement        

or hereafter arising or acquired and wherever located: all Accounts; all Inventory; all Equipment; all Deposit Accounts; all Instruments; all Chattel Paper and Documents; all General Intangibles (including without limitation all Intellectual Property); all Investment Property; all other property; and any and all claims, rights and interests in any of the above, and all guaranties and security for any of the above, and all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of, any and all of the above, and all Borrower’s books relating to any and all of the above. Notwithstanding the foregoing, no such security interest shall be granted with respect to any of the foregoing to the extent such items are subject to Permitted Liens.

3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.

In order to induce Silicon to enter into this Agreement and to make Loans, Borrower represents and warrants to Silicon as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants, throughout the term of this Agreement and until all Obligations have been paid and performed in full:

3.1 Corporate Existence and Authority. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the State of Delaware. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would result in a Material Adverse Change. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby: (a) have been duly and validly authorized; (b) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors’ rights generally); (c) do not violate Borrower’s articles or certificate of incorporation, or Borrower’s by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property; and (d) do not constitute grounds for acceleration of any material indebtedness or obligation under any agreement or instrument which is binding upon Borrower or its property.

3.2 Name; Trade Names and Styles. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed in the Representations are all prior names of Borrower and all of Borrower’s present and prior trade names. Borrower shall give Silicon thirty (30) days’ prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, in all material respects, with all laws relating to the conduct of business under a fictitious business name, except where the failure to so comply would not reasonably be expected to result in a Material Adverse Change.

3.3 Place of Business; Location of Collateral. The address set forth in the heading to this Agreement is Borrower’s chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth in the Representations. Borrower will give Silicon at least ten (10) days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower’s Address or one of the locations set forth in the Representations, except that Borrower may maintain sales offices in the ordinary course of business at which not more than a total of $100,000 fair market value of Equipment is located.

3.4 Title to Collateral; Perfection; Permitted Liens.

(a) Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased to Borrower. The Collateral now is and will remain free and

-3-

Silicon Valley Bank Loan and Security Agreement        

clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Silicon now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Silicon and the Collateral against all claims of others.

(b) Borrower has set forth in the Representations all of Borrower’s Deposit Accounts, and Borrower will give Silicon five (5) Business Days advance written notice before establishing any new Deposit Accounts and will cause the institution where any such new Deposit Account is maintained to execute and deliver to Silicon a control agreement in form sufficient to perfect Silicon’s security interest in the Deposit Account and otherwise satisfactory to Silicon in its good faith business judgment. Nothing herein limits any requirements which may be set forth in the Schedule as to where Deposit Accounts will be maintained.

(c) In the event that Borrower shall at any time after the date hereof have any commercial tort claims against others, which it is asserting or intends to assert, and in which the potential recovery exceeds $100,000, Borrower shall promptly notify Silicon thereof in writing and provide Silicon with such information regarding the same as Silicon shall request (unless providing such information would waive Borrower’s attorney-client privilege). Such notification to Silicon shall constitute a grant of a security interest in the commercial tort claim and all proceeds thereof to Silicon, and Borrower shall execute and deliver all such documents and take all such actions as Silicon shall request in connection therewith.

(d) None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower’s right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest, Borrower shall, whenever requested by Silicon, use its best efforts to cause such third party to execute and deliver to Silicon, in form acceptable to Silicon, such waivers and subordinations as Silicon shall specify in its good faith business judgment. Borrower will keep in full force and effect and will comply with all material terms of any lease of real property where any of the Collateral now or in the future may be located.

3.5 Maintenance of Collateral. Borrower will use commercially reasonable efforts to maintain the Collateral in good working condition (ordinary wear and tear excepted), and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise Silicon in writing of any material loss or damage to the Collateral.

3.6 Books and Records. Borrower has maintained and will maintain at Borrower’s Address complete and accurate books and records, comprising an accounting system in accordance with GAAP.

3.7 Financial Condition, Statements and Reports. All financial statements now or in the future delivered to Silicon have been and will be prepared in conformity with GAAP and now and in the future will fairly present the results of operations and financial condition of Borrower, in accordance with GAAP, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Silicon and the date hereof, there has been no Material Adverse Change.

3.8 Tax Returns and Payments; Pension Contributions. Borrower and each Subsidiary are current with respect to all required material tax returns, reports and payments required to be filed with or paid to any federal, state, local or foreign taxing authorities, and Borrower and each Subsidiary will timely file

-4-

Silicon Valley Bank Loan and Security Agreement        

all required material tax returns and reports, and Borrower and each Subsidiary will timely pay all material foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower or any Subsidiary. Borrower and each Subsidiary may, however, defer payment of any contested taxes, provided that Borrower and/or such Subsidiary: (a) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Silicon in writing of the commencement of and any material development in the proceedings, and (c) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. Borrower and each Subsidiary are unaware of any claims or adjustments proposed for any of Borrower’s or any Subsidiary’s prior tax years which could result in additional taxes becoming due and payable by Borrower or such Subsidiary. Borrower and each Subsidiary have paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower and each Subsidiary have not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower or any Subsidiary, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Notwithstanding the foregoing, Silicon acknowledges that Borrower’s existing defined benefit plan was terminated with respect to further participation by the Company’s employees as of September 2000 and is, as of the date hereof, underfunded in the amount of $6,000,000.

3.9 Compliance with Law. Borrower has, to the best of its knowledge, complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations applicable to Borrower, including, but not limited to, those relating to Borrower’s ownership of real or personal property, the conduct and licensing of Borrower’s business, and all environmental matters.

3.10 Litigation. Except as set forth in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower’s knowledge) threatened against or affecting Borrower or any Subsidiary in any court or before any governmental agency (or any basis therefor known to Borrower) which could reasonably be expected to result, either separately or in the aggregate, in any Material Adverse Change. Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted against Borrower or any Subsidiary involving any single claim of $50,000 or more, or involving $100,000 or more in the aggregate.

3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any “margin stock” (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any “margin stock” or to extend credit to others for the purpose of purchasing or carrying any “margin stock.”

4. ACCOUNTS.

4.1 Representations Relating to Accounts. Borrower represents and warrants to Silicon as follows: Each Account with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made: (a) represent an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services, or the non-exclusive licensing of Intellectual Property, in the ordinary course of Borrower’s business, and (b) meet the Minimum Eligibility Requirements set forth in Section 8 below.

4.2 Representations Relating to Documents and Legal Compliance. Borrower represents and warrants to Silicon as follows: all statements made and all unpaid balances appearing in all invoices,

-5-

Silicon Valley Bank Loan and Security Agreement        

instruments and other documents evidencing the Accounts are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower’s books and records are and shall be genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Account shall comply in all material respects with all applicable laws and governmental rules and regulations. To the best of Borrower’s knowledge, all signatures and endorsements on all documents, instruments, and agreements relating to all Accounts are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms.

4.3 Schedules and Documents Relating to Accounts. Borrower shall deliver to Silicon transaction reports and schedules of collections, as provided in the Schedule, on Silicon’s standard forms; provided, however, that Borrower’s failure to execute and deliver the same shall not affect or limit Silicon’s security interest and other rights in all of Borrower’s Accounts, nor shall Silicon’s failure to advance or lend against a specific Account affect or limit Silicon’s security interest and other rights therein. If requested by Silicon, Borrower shall furnish Silicon with copies (or, at Silicon’s request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Silicon an aged accounts receivable trial balance as provided in the Schedule. In addition, Borrower shall deliver to Silicon, on its request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all necessary indorsements, and copies of all credit memos.

4.4 Collection of Accounts. Borrower shall have the right to collect all Accounts, unless and until a Default or an Event of Default has occurred and is continuing. Whether or not an Event of Default has occurred and is continuing, Borrower shall hold all payments on and proceeds of Accounts in trust for Silicon, and Borrower shall immediately deliver all such payments and proceeds to Silicon in their original form, duly endorsed, to be applied to the Obligations in such order as Silicon shall determine. Silicon may, in its good faith business judgment, require that all proceeds of Collateral be deposited by Borrower into a lockbox account, or such other “blocked account” as Silicon may specify, pursuant to a blocked account agreement in such form as Silicon may specify in its good faith business judgment.

4.5. Remittance of Proceeds. All proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to Silicon in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as Silicon shall determine; provided that, if no Default or Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to Silicon the proceeds of the sale of worn out or obsolete Equipment disposed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of $50,000 or less (for all such transactions in any fiscal year), or from the retirement of collateral that is replaced in the ordinary course of business. Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Silicon. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

4.6 Disputes. Borrower shall notify Silicon promptly of all disputes or claims relating to Accounts that exceed, in any one instance $10,000, or in the aggregate, $50,000. Borrower shall not forgive (completely or partially), compromise or settle any Account for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so provided that: (a) Borrower does so in good faith,

-6-

Silicon Valley Bank Loan and Security Agreement        

in a commercially reasonable manner, in the ordinary course of business, and in arm’s length transactions, which are reported to Silicon on the regular reports provided to Silicon; (b) no Default or Event of Default has occurred and is continuing; and (c) taking into account all such discounts, settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit.

4.7 Returns. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, Borrower shall hold the returned Inventory in trust for Silicon, and immediately notify Silicon of the return of the Inventory.

4.8 Verification. Silicon may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts, by means of mail, telephone or otherwise, either in the name of Borrower or Silicon or such other name as Silicon may choose.

4.9 No Liability. Silicon shall not be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall Silicon be deemed to be responsible for any of Borrower’s obligations under any contract or agreement giving rise to an Account. Nothing herein shall, however, relieve Silicon from liability for its own gross negligence or willful misconduct.

5. ADDITIONAL DUTIES OF BORROWER.

5.1 Financial and Other Covenants. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule.

5.2 Insurance. Borrower shall at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Silicon, in such form and amounts as Silicon may reasonably require and that are customary and in accordance with standard practices for Borrower’s industry and locations, and Borrower shall provide evidence of such insurance to Silicon. All such insurance policies shall name Silicon as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such insurance, Silicon shall apply such proceeds in reduction of the Obligations as Silicon shall determine in its good faith business judgment, except that, provided no Default or Event of Default has occurred and is continuing, Silicon shall release to Borrower insurance proceeds with respect to Equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Silicon may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated to, obtain the same at Borrower’s expense. Borrower shall promptly deliver to Silicon copies of all material reports made to insurance companies.

5.3 Reports. Borrower, at its expense, shall provide Silicon with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Silicon shall from time to time specify in its good faith business judgment.

5.4 Access to Collateral, Books and Records. At reasonable times, and on five (5) Business Day’s notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy

-7-

Silicon Valley Bank Loan and Security Agreement        

Borrower’s books and records. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower’s expense and the charge therefor shall be $750 per person per day (or such higher amount as shall represent Silicon’s then current standard charge for the same), plus reasonable out of pocket expenses.

5.5 Negative Covenants. Except as may be permitted in the Schedule and elsewhere in this Agreement, Borrower shall not, without Silicon’s prior written consent (which shall be a matter of its good faith business judgment), do any of the following: (a) merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with another corporation or entity; (b) acquire, or permit any of its Subsidiaries to acquire, any assets, except in the ordinary course of business or if the total purchase price of such acquisition does not exceed $100,000; (c) enter into, or permit any of its Subsidiaries to enter into, any other transaction outside the ordinary course of business; (d) sell or transfer any Collateral, or permit any of its Subsidiaries to do so, except for the sale of finished Inventory in the ordinary course of business, and except for the sale of obsolete or unneeded Inventory or Equipment in the ordinary course of business; (e) store any Inventory or other Collateral with any warehouseman or other third party, except as incidental to the shipment thereof; (f) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (g) make any loans of any money or other assets or permit any of its Subsidiaries to do so, other than intercompany loans from Borrower to a Subsidiary or from a Subsidiary to another Subsidiary or to Borrower; (h) incur any debts, or permit any of its Subsidiaries to do so, outside the ordinary course of business, which would result in a Material Adverse Change; (i) guarantee or otherwise become liable with respect to the obligations of another party or entity or permit any of its Subsidiaries to do so; (j) pay or declare any dividends on Borrower’s stock (except for dividends payable solely in stock of Borrower); (k) except for any agreement in effect on the date of this Agreement, redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower’s stock; (l) make any change in Borrower’s capital structure which would result in a Material Adverse Change or permit any Subsidiary to do so; or (m) engage, directly or indirectly, in any business other than the businesses currently engaged in by Borrower or reasonably related thereto or permit any Subsidiary to do so; or (n) dissolve or elect to dissolve or permit any Subsidiary to do so. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a result of such transaction.

5.6 Litigation Cooperation. Should any third-party suit or proceeding be instituted by or against Silicon with respect to any Collateral or relating to Borrower, Borrower shall, without expense to Silicon, make available Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding.

5.7 Further Assurances. Borrower agrees, at its expense, on request by Silicon, to execute all documents and take all actions, as Silicon, may, in its good faith business judgment, deem necessary or useful in order to perfect and maintain Silicon’s perfected first-priority security interest in the Collateral (subject to Permitted Liens), and in order to fully consummate the transactions contemplated by this Agreement.

6. TERM.

6.1 Maturity Date. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the “Maturity Date”), subject to Section 6.3 below.

-8-

Silicon Valley Bank Loan and Security Agreement        

6.2 Early Termination. This Agreement may be terminated prior to the Maturity Date as follows: (a) by Borrower, effective three (3) Business Days after written notice of termination is given to Silicon; or (b) by Silicon at any time after the occurrence and during the continuance of an Event of Default, effective five (5) Business Days after written notice of termination is given to Borrower, and only if the Default is not cured prior to the end of such notice period. If this Agreement is terminated by Borrower or by Silicon under this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount set forth on the Schedule, provided that no termination fee shall be charged if the credit facility hereunder is replaced with a new facility from another division of Silicon Valley Bank. The termination fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the highest rate applicable to any of the Obligations.

6.3 Payment of Obligations. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit issued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to one hundred five percent (105%) of the face amount of all such Letters of Credit plus all interest, fees and cost due or to become due in connection therewith (as estimated by Silicon in its good faith business judgment), to secure all of the Obligations relating to said Letters of Credit, pursuant to Silicon’s then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Silicon’s security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that Silicon may in its sole discretion refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination relieve Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Silicon shall promptly terminate its financing statements with respect to Borrower and deliver to Borrower such other documents as may be required to fully terminate Silicon’s security interests.

7. EVENTS OF DEFAULT AND REMEDIES.

7.1 Events of Default. The occurrence of any of the following events without the prior written consent of Silicon shall constitute an “Event of Default” under this Agreement, and Borrower shall give Silicon prompt, and in any event within two (2) business Days, written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Silicon by Borrower or any of Borrower’s officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect when made or deemed to be made; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation,; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to comply with any of the financial covenants set forth in the Schedule, or shall fail to perform any other material non-monetary Obligation which by its nature cannot be cured, or shall fail to permit Silicon to conduct an inspection or audit as specified in Section 5.4 hereof; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within five (5) Business Days after the date due; or (f) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any material part of the Collateral which is not cured within ten (10) days after the occurrence of the same; or (g) any default or event of default by Borrower of any Subsidiary occurs under any obligation secured

-9-

Silicon Valley Bank Loan and Security Agreement        

by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien and which has resulted or may reasonably be expected to result in a Material Adverse Change; or (h) Borrower breaches any material contract or obligation, which has resulted or may reasonably be expected to result in a Material Adverse Change; or (i) dissolution, termination of existence, failure to be Solvent, or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within thirty (30) days after the date commenced; or (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (n) there shall be a change in the record or beneficial ownership of an aggregate of more than thirty percent (30%) of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of Borrower in effect on the date hereof, without the prior written consent of Silicon; or (o) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) a Material Adverse Change shall occur. Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred and is continuing. In addition, the occurrence of any of the events described in clauses (f), (h), (i), (j) or (p) above with respect to any Subsidiary of Borrower with assets is an aggregate amount in excess of $20,000 shall constitute an Event of Default hereunder.

7.2 Remedies. Upon the occurrence and during the continuance of any Event of Default, and at any time thereafter, Silicon, at its option and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other Loan Document; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Silicon without judicial process to enter onto any of Borrower’s premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Silicon deems it necessary, in its good faith business judgment, in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Silicon seek to take possession of any of the Collateral by

-10-

Silicon Valley Bank Loan and Security Agreement        

court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession, (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof, and (iii) any requirement that Silicon retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Silicon at places designated by Silicon which are reasonably convenient to Silicon and Borrower, and to remove the Collateral to such locations as Silicon may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Silicon shall have the right to use Borrower’s premises, vehicles, hoists, lifts, cranes, and other Equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Silicon obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Silicon shall have the right to conduct such disposition on Borrower’s premises without charge, for such time or times as Silicon deems reasonable, or on Silicon’s premises, or elsewhere and the Collateral need not be located at the place of disposition. Silicon may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Accounts and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Silicon to endorse or sign Borrower’s name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Silicon’s good faith business judgment, to grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value; (h) Offset against any sums in any of Borrower’s general, special or other Deposit Accounts with Silicon against any or all of the Obligations; and (i) Demand and receive possession of any of Borrower’s federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys’ fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of Silicon’s rights and remedies, from and after the occurrence and during the continuance of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional four percent (4%) per annum (the “Default Rate”).

7.3 Standards for Determining Commercial Reasonableness. Borrower and Silicon agree that a sale or other disposition (collectively, “sale”) of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (a) Notice of the sale is given to Borrower at least ten (10) days prior to the sale, and, in the case of a public sale, notice of the sale is published at least five days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (b) Notice of the sale describes the collateral in general, non-specific terms; (c) The sale is conducted at a place designated by Silicon, with or without the Collateral being present; (d) The sale commences at any time between 8:00 a.m. and 6:00 p.m.; (e) Payment of the purchase price in cash or by cashier’s check or wire transfer is required; and (f) With respect to any sale of any of the Collateral, Silicon may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Silicon shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable.

-11-

Silicon Valley Bank Loan and Security Agreement        

7.4 Power of Attorney. Upon the occurrence and during the continuance of any Event of Default, without limiting Silicon’s other rights and remedies, Borrower grants to Silicon an irrevocable power of attorney coupled with an interest, authorizing and permitting Silicon (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower’s expense, to do any or all of the following, in Borrower’s name or otherwise, but Silicon agrees that if it exercises any right hereunder, it will do so in good faith and in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Silicon may, in its good faith business judgment, deem advisable in order to perfect and maintain Silicon’s security interest in the Collateral, or in order to exercise a right of Borrower or Silicon, or in order to fully consummate all the transactions contemplated under this Agreement, and all other Loan Documents; (b) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic’s, materialman’s or other lien, or assignment or satisfaction of mechanic’s, materialman’s or other lien; (c) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Silicon’s possession; (d) Endorse all checks and other forms of remittances received by Silicon; (e) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (f) Grant extensions of time to pay, compromise claims and settle Accounts and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (g) Pay any sums required on account of Borrower’s taxes or to secure the release of any liens therefor, or both; (h) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (i) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Silicon the same rights of access and other rights with respect thereto as Silicon has under this Agreement; and (j) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other Loan Documents. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and attorneys’ fees incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Silicon’s rights under the foregoing power of attorney or any of Silicon’s other rights under this Agreement be deemed to indicate that Silicon is in control of the business, management or properties of Borrower.

7.5 Application of Proceeds. All proceeds realized as the result of any sale of the Collateral shall be applied by Silicon first to the reasonable costs, expenses, liabilities, obligations and attorneys’ fees incurred by Silicon in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Silicon shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Silicon shall have the option, exercisable at any time, in its good faith business judgment, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Silicon of the cash therefor.

-12-

Silicon Valley Bank Loan and Security Agreement        

7.6 Remedies Cumulative. In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies accorded a secured party under the Georgia Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Silicon and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed.

8. DEFINITIONS. As used in this agreement, the following terms have the following meanings:

“Account Debtor” means the obligor on an Account.

“Accounts” means all present and future “accounts” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all accounts receivable and other sums owing to Borrower.

“Affiliate” means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person.

“Business Day” means a day on which Silicon is open for business.

“Code” means the Uniform Commercial Code as adopted and in effect in the State of Georgia from time to time.

“Collateral” has the meaning set forth in Section 2 above.

“continuing” and “during the continuance of” when used with reference to a Default or Event of Default means that the Default or Event of Default has occurred and has not been either waived in writing by Silicon or cured within any applicable cure period.

“Default” means any event which with notice or passage of time or both, would constitute an Event of Default.

“Default Rate” has the meaning set forth in Section 7.2 above.

“Deposit Accounts” means all present and future “deposit accounts” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all general and special bank accounts, demand accounts, checking accounts, savings accounts and certificates of deposit.

“Eligible Accounts” means Accounts and General Intangibles arising in the ordinary course of Borrower’s business from the sale of goods or the rendition of services, or the non-exclusive licensing of Intellectual Property, or the exclusive licensing of Intellectual Property to Teltronics, Inc. and King Technologies, Inc. up to $500,000 in the aggregate, which Silicon, in its good faith business judgment, shall deem eligible for borrowing. Without limiting the fact that the determination of which Accounts are eligible for borrowing is a matter of Silicon’s good faith business judgment, the following (the “Minimum Eligibility Requirements”) are the minimum requirements for an Account to be an Eligible Account: (a) the Account must not be outstanding for more than ninety (90) days from its invoice date (the “Eligibility Period”); (b) the Account must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor; (c) the Account must not be subject to any

-13-

Silicon Valley Bank Loan and Security Agreement        

contingencies (including Accounts arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be conditional); (d) the Account must not be owing from an Account Debtor with whom Borrower has any dispute (whether or not relating to the particular Account); (e) the Account must not be owing from an Affiliate of Borrower; (f) the Account must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not acceptable to Silicon, or which, fails or goes out of a material portion of its business; (g) the Account must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to Silicon’s satisfaction, with the United States Assignment of Claims Act); (h) the Account must not be owing from an Account Debtor located outside the United States or Canada (unless pre-approved by Silicon in its discretion in writing, or backed by a letter of credit satisfactory to Silicon, or FCIA insured satisfactory to Silicon); and (i) the Account must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise (but, in such case, the Account will be deemed not eligible only to the extent of any amounts owed by Borrower to such Account Debtor). Accounts owing from one Account Debtor will not be deemed Eligible Accounts to the extent they exceed seventy-five percent (25%) of the total Accounts outstanding in the case of Account Debtors other than Graybar Electric Company, Inc. (“Graybar Electric”), or exceed forty percent (40%) of the total Accounts outstanding in the case of Accounts where Graybar Electric is the Account Debtor. In addition, if more than fifty (50%) of the Accounts owing from an Account Debtor other than Graybar Electric, or if more than twenty-five percent (25%) of the Accounts where Graybar Electric is the Account Debtor, are outstanding for a period longer than their Eligibility Period (without regard to unapplied credits) or are otherwise not Eligible Accounts, then all Accounts owing from that Account Debtor will be deemed ineligible for borrowing. Silicon may, from time to time, in its good faith business judgment, revise the Minimum Eligibility Requirements, upon written notice to Borrower.

“Equipment” means all present and future “equipment” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

“Event of Default” means any of the events set forth in Section 7.1 of this Agreement.

“GAAP” means generally accepted accounting principles consistently applied.

“General Intangibles” means all present and future “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all Intellectual Property, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

“good faith business judgment” means honesty in fact and good faith (as defined in Section 1201 of the Code) in the exercise of Silicon’s business judgment.

“including” means including (but not limited to).

“Intellectual Property” means all present and future (a) copyrights, copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work

-14-

Silicon Valley Bank Loan and Security Agreement        

thereof, whether published or unpublished, (b) trade secret rights, including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the protection of semiconductor chips; (d) patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same; (e) trademarks, servicemarks, trade styles, and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by any such trademarks; (f) computer software and computer software products; (g) designs and design rights; (h) technology; (i) all claims for damages by way of past, present and future infringement of any of the rights included above; (j) all licenses or other rights to use any property or rights of a type described above.

“Inventory” means all present and future “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

“Investment Property” means all present and future investment property, securities, stocks, bonds, debentures, debt securities, partnership interests, limited liability company interests, options, security entitlements, securities accounts, commodity contracts, commodity accounts, and all financial assets held in any securities account or otherwise, and all options and warrants to purchase any of the foregoing, wherever located, and all other securities of every kind, whether certificated or uncertificated.

“Loan Documents” means, collectively, this Agreement, the Representations, and all other present and future documents, instruments and agreements between Silicon and Borrower, including, but not limited to those relating to this Agreement, and all amendments and modifications thereto and replacements therefor.

“Material Adverse Change” means any of the following: (a) a material adverse change in the business, operations, or financial or other condition of Borrower, or (b) a material impairment of the prospect of repayment of any portion of the Obligations, or (c) a material impairment of the value or priority of Silicon’s security interests in the Collateral.

“Obligations” means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Silicon, whether evidenced by this Agreement or any note or other instrument or document, or otherwise, whether arising from an extension of credit, opening of a letter of credit, banker’s acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Silicon in Borrower’s debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney’s fees, expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other Loan Documents.

“Other Property” means the following as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and all rights relating thereto: all present and future “commercial tort claims” (including without limitation any commercial tort claims identified in the Representations), “documents”, “instruments”, “promissory notes”, “chattel paper”, “letters of credit”, “letter-of-credit rights”, “fixtures”, “farm products” and “money”; and all other goods and personal property of every kind, tangible and intangible, whether or not governed by the Code.

-15-

Silicon Valley Bank Loan and Security Agreement        

“Payment” means all checks, wire transfers and other items of payment received by Silicon (including proceeds of Accounts and payment of the Obligations in full) for credit to Borrower’s outstanding Loans or, if the balance of the Loans have been reduced to zero, for credit to its Deposit Accounts.

“Permitted Liens” means the following: (a) purchase money security interests in specific items of Equipment; (b) leases of specific items of Equipment; (c) liens for taxes not yet payable; (d) additional security interests and liens consented to in writing by Silicon, which consent may be withheld in its good faith business judgment; (e) security interests being terminated substantially concurrently with this Agreement; (f) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (g) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (a) or (b) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; (h) liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods; and (i) any liens, encumbrances or interests specifically set forth in the Schedule. Silicon will have the right to require, as a condition to its consent under subparagraph (d) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Silicon’s then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Silicon, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement.

“Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, limited liability company, corporation, government, or any agency or political division thereof, or any other entity.

“Representations” means the written Representations and Warranties provided by Borrower to Silicon referred to in the Schedule.

“Reserves” means, as of any date of determination, such amounts as Silicon may from time to time establish and revise in its good faith business judgment, reducing the amount of Loans, Letters of Credit and other financial accommodations which would otherwise be available to Borrower under the lending formula(s) provided in the Schedule: (a) to reflect events, conditions, contingencies or risks which, as determined by Silicon in its good faith business judgment, do or may adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Accounts), (ii) the assets, business or prospects of Borrower or any guarantor of the Obligations, or (iii) the security interests and other rights of Silicon in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Silicon’s good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Guarantor to Silicon is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Silicon determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

“Subsidiary” is for any Person, or any other business entity of which more than fifty percent (50%) of the voting stock of other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person.

-16-

Silicon Valley Bank Loan and Security Agreement        

Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein.

9. GENERAL PROVISIONS.

9.1 Interest Computation; Float Charge. In computing interest on the Obligations, all Payments received after 12:00 Noon on any day shall be deemed received on the next Business Day. In addition, Silicon shall be entitled to charge Borrower a “float” charge in an amount equal to one (1) Business Day’s interest, at the interest rate applicable to the Loans, on all Payments received by Silicon. Said float charge is not included in interest for purposes of computing Minimum Monthly Interest (if any) under this Agreement. The float charge for each month shall be payable on the last day of the month.

9.2 Application of Payments. All payments with respect to the Obligations may be applied, and in Silicon’s good faith business judgment reversed and reapplied, to the Obligations, in such order and manner as Silicon shall determine in its good faith business judgment.

9.3 Charges to Accounts. Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower’s Loan account, in which event they will bear interest at the same rate applicable to the Loans. Silicon may also, in its discretion, charge any monetary Obligations to Borrower’s Deposit Accounts maintained with Silicon.

9.4 Monthly Accountings. Silicon shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Silicon), unless Borrower notifies Silicon in writing to the contrary within sixty (60) days after such account is rendered, describing the nature of any alleged errors or omissions.

9.5 Notices. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt requested, addressed to Silicon or Borrower at each of the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Notices to Silicon shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one (1) Business Day following delivery to the private delivery service, or two (2) Business Days following the deposit thereof in the United States mail, with postage prepaid.

9.6 Severability. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect.

9.7 Integration. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Silicon and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith.

-17-

Silicon Valley Bank Loan and Security Agreement        

9.8 Waivers; Indemnity. The failure of Silicon at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other Loan Document shall not waive or diminish any right of Silicon later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other Loan Document shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an authorized officer of Silicon and delivered to Borrower. Borrower waives the benefit of all statutes of limitations relating to any of the Obligations or this Agreement or any other Loan Document, and Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Silicon on which Borrower is or may in any way be liable, and notice of any action taken by Silicon, unless expressly required by this Agreement. Borrower hereby agrees to indemnify Silicon and its affiliates, subsidiaries, parent, directors, officers, employees, agents, and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including reasonable attorneys’ fees), of every kind, which they may sustain or incur based upon or arising out of any of the Obligations, or any relationship or agreement between Silicon and Borrower, or any other matter, relating to Borrower or the Obligations; provided that this indemnity shall not extend to damages proximately caused by the indemnitee’s own gross negligence or willful misconduct. Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect.

9.9 No Liability for Ordinary Negligence. Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon, but nothing herein shall relieve Silicon from liability for its own gross negligence or willful misconduct.

9.10 Amendment. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Silicon.

9.11 Time of Essence. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement.

9.12 Attorneys Fees and Costs. Borrower shall reimburse Silicon for all reasonable attorneys’ fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys’ fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and all present and future documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower’s books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon’s security interest in, the Collateral; and otherwise represent Silicon in any litigation relating to Borrower. In satisfying

-18-

Silicon Valley Bank Loan and Security Agreement        

Borrower’s obligation hereunder to reimburse Silicon for attorneys fees, Borrower may, for convenience, issue checks directly to Silicon’s attorneys, Troutman Sanders LLP, but Borrower acknowledges and agrees that Troutman Sanders LLP is representing only Silicon and not Borrower in connection with this Agreement. If either Silicon or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys’ fees, including (but not limited to) reasonable attorneys’ fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys’ fees and costs to which Silicon may be entitled pursuant to this Paragraph shall immediately become part of Borrower’s Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.

9.13 Benefit of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Silicon; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Silicon, and any prohibited assignment shall be void. No consent by Silicon to any assignment shall release Borrower from its liability for the Obligations.

9.14 Joint and Several Liability. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower.

9.15 Limitation of Actions. Any claim or cause of action by Borrower against Silicon, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other Loan Document, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within one (1) year after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Silicon, or on any other person authorized to accept service on behalf of Silicon, within thirty (30) days thereafter. Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of Silicon in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other Loan Document.

9.16 Paragraph Headings; Construction. Paragraph headings are only used in this Agreement for convenience. Borrower and Silicon acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or Borrower under any rule of construction or otherwise.

9.17 Governing Law; Jurisdiction; Venue. This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and Borrower shall be governed by the laws of the State of Georgia. As a material part of the consideration to Silicon to enter into this Agreement, Borrower: (a) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Silicon’s option, be litigated in state or federal courts located within the State of Georgia; (b) consents to the

-19-

Silicon Valley Bank Loan and Security Agreement        

jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (c) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding, provided, however, that if for any reason Silicon cannot avail itself of such courts in the State of Georgia, Borrower accepts jurisdiction of the courts and venue in Santa Clara, California.

9.18 Mutual Waiver of Jury Trial. BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

Borrower:	Silicon:
COMDIAL CORPORATION	SILICON VALLEY BANK
By:	By:
Name:	Name:
Title:	Title:

-20-

Silicon Valley Bank Loan and Security Agreement        

Silicon Valley Bank

Schedule to

Loan and Security Agreement

Borrower:	Comdial Corporation
Address:	106 Cattlemen Road
	Sarasota, Florida 34232
Date:	April 28, 2004

This Schedule forms an integral part of the Loan and Security Agreement between Silicon Valley Bank and the above-borrower of even date.

1. CREDIT LIMIT:
(Section 1.1):	An amount not to exceed the lesser of: (i) $2,500,000 at any one time outstanding (the “Maximum Credit Limit”); or (ii) 75% (the “Advance Rate”) of the amount of Borrower’s Eligible Accounts minus (b) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), minus (c) all amounts for services utilized under the Cash Management Services Sublimit.
	Silicon may, from time to time, modify the Advance Rate, in its good faith business judgment, upon notice to Borrower, based on changes in collection experience with respect to Accounts or other issues or factors relating to the Accounts or other Collateral.
Letter of Credit Sublimit:
(Section 1.6):	$1,500,000
Cash Management Sublimit:	$150,000
(Section 1.7)

Silicon Valley Bank Loan and Security Agreement        

2. INTEREST.
	Interest Rate (SECTION 1.2):
		A rate equal to the “Prime Rate” in effect from time to time, plus three (3) percentage points per annum. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. “Prime Rate” means the greater of (i) four percent (4%) and (ii) the rate announced from time to time by Silicon as its “prime rate”; it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate.
3. FEES (Section 1.4):
	Line Fee:	(i) $30,000 payable concurrently herewith, and (ii) $15,000 payable on the first anniversary of the date of this Agreement
	Collateral Monitoring Fee:	$1,000, per month, payable in arrears (prorated for any partial month at the beginning and at termination of this Agreement).
	Unused Portion Fee:	Borrower shall pay to Silicon a fee (collectively, the “Unused Line Fees” and individually, an “Unused Line Fee”) in an amount equal to 0.375% per annum of the average daily unused and undisbursed portion of the Maximum Credit Limit accruing during each month. The accrued and unpaid portion of the Unused Line Fee shall be paid by Borrower to Silicon on the last day of each month, commencing on the first such date following the date hereof, and on the Maturity Date.
	Termination Fee:	Borrower shall pay to Silicon a fee (the “Termination Fee”) equal to (i) $25,000 (1.0%) to terminate the credit facility prior to October     , 2004 (six (6) months from the date hereof), and (ii) $12,500 (0.5%) to terminate the credit facility prior to April     , 2005 (twelve (12) months from the date hereof); provided, however, no Termination Fee shall be charged if the credit facility hereunder is replaced with a new facility from another division of Silicon Valley Bank.

Silicon Valley Bank Loan and Security Agreement        

4. MATURITY DATE
(Section 6.1):		October 31, 2005 (eighteen (18) months from the date hereof)
5. FINANCIAL COVENANTS
(Section 5.1):		Borrower shall comply with each of the following covenants. Compliance shall be determined as of the end of each month, except as otherwise specifically provided below:
	Minimum Adjusted Tangible Net Worth:	Borrower shall maintain an Adjusted Tangible Net Worth of not less than ($2,000,000) plus twenty five percent (25%) of consolidated net income (without regard to any loss) from each year of Borrower, plus twenty five percent (25%) of the net proceeds from any issuance by Borrower of equity or subordinate debt after the date of the Agreement.
	Definitions:	For purposes of the foregoing financial covenants, the following term shall have the following meaning:
		“Adjusted Tangible Net Worth” shall mean the excess of total assets over total liabilities, determined in accordance with GAAP, with the following adjustments:
			(A) there shall be excluded from assets: (i) notes, accounts receivable and other obligations owing to Borrower from its officers or other Affiliates, and (ii) all assets which would be classified as intangible assets under GAAP, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises
			(B) there shall be excluded from liabilities: all indebtedness which is subordinated to the Obligations under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which Silicon agrees in writing is acceptable to Silicon in its good faith business judgment.

Silicon Valley Bank Loan and Security Agreement        

6. REPORTING.
(Section 5.3):
	Borrower shall provide Silicon with the following:
	1.	Weekly transaction reports and schedules of collections, on Silicon’s standard form.
	2.	Monthly accounts receivable agings, aged by invoice date, within thirty (30) days after the end of each month.
	3.	Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within thirty (30) days after the end of each month.
	4.	Monthly reconciliations of accounts receivable agings (aged by invoice date), transaction reports, and general ledger, within thirty (30) days after the end of each month.
	5.	Monthly schedules of deferred revenue, within thirty (30) days after the end of each month.
	6.	Monthly unaudited financial statements, as soon as available, and in any event within thirty (30) days after the end of each month.
	7.	Monthly Compliance Certificates, within thirty (30) days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks.
	8.	Monthly schedules of street sales and distributor inventory, within thirty (30) days after the end of each month.
	9.	Annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower within thirty (30) days prior to the end of each fiscal year of Borrower.
	10.	Annual audited financial statements, as soon as available, and in any event within one hundred twenty (120) days following the end of Borrower’s fiscal year, certified by, and with an unqualified opinion of, independent certified public accountants acceptable to Silicon.

Silicon Valley Bank Loan and Security Agreement        

7. BORROWER INFORMATION:
	Borrower represents and warrants that the information set forth in the Representations and Warranties of Borrower dated March 12, 2004 previously submitted to Silicon (the “Representations”) is true and correct as of the date hereof.
8. ADDITIONAL PROVISIONS
	1.	Banking Relationship. Borrower shall at all times maintain all of its primary banking relationship with Silicon. As to any Deposit Accounts and investment accounts maintained with another institution, Borrower shall cause such institution, within thirty (30) days after the date of this Agreement, to enter into a control agreement in form acceptable to Silicon in its good faith business judgment in order to perfect Silicon’s first-priority security interest in said Deposit Accounts and investment accounts.
	2.	Subordination of Inside Debt. All present and future indebtedness of Borrower to its officers, directors and shareholders (“Inside Debt”) shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on Silicon’s standard form. Borrower represents and warrants that there is no Inside Debt presently except as set forth on Exhibit C hereto. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Silicon a subordination agreement on Silicon’s standard form.
	3.	Conditions Precedent. As conditions precedent to the effectiveness of this Agreement, Borrower shall have (a) executed and delivered (i) an Intellectual Property Security Agreement (the “IP Security Agreement”), and (ii) a Stock Pledge Agreement (the “Stock Pledge Agreement”) and (iii) a Subordination Agreement and (b) shall have caused each Subsidiary to execute and deliver (i) an Unconditional Guaranty (the “Guaranty), (ii) a Security Agreement (the “Security Agreement”) and (iii) an Intellectual Property Security Agreement], all in form and substance acceptable to Silicon in its sole discretion

Silicon Valley Bank Loan and Security Agreement        

Borrower:	Silicon:
COMDIAL CORPORATION	SILICON VALLEY BANK
By:	By:
Name:	Name:
Title:	Title:

Silicon Valley Bank Loan and Security Agreement        

COMPLIANCE CERTIFICATE

To:	Silicon Valley Bank
	3003 Tasman Drive
	Santa Clara, California 95054
From:	Comdial Corporation
	106 Cattlemen Road
	Sarasota, Florida 34232

The undersigned authorized Officer of Comdial Corporation (“Borrower”), hereby certifies that, to the best of his knowledge, in accordance with the terms and conditions of the Loan and Security Agreement, as modified from time to time, Borrower is in complete compliance for the period ending                      of all required conditions and terms except as noted below. Attached herewith are the required documents supporting the above certification. The Officer further certifies that, to the best of his knowledge, these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistent from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

REPORTING COVENANT	REQUIRED	COMPLIES
Financials & Comp. Cert.	Monthly w/in 30 days	YES/NO
Receivable agings (invoice date)	Monthly w/in 30 days	YES/NO
Reconciliations of A/R agings,	Monthly w/in 30 days	YES/NO
Transactions reports, G/L
Payables agings	Monthly w/in 30 days	YES/NO
Held Checks		YES/NO
If YES, Held Checks Register	Monthly w/in 30 days	YES/NO
Audited Annual Financials	FYE w/in 120 days	YES/NO
Annual Operating Budget	W/in 30 days prior to FYE	YES/NO
Deferred Revenue Schedules	Monthly w/in 30 days	YES/NO
Street Sales & Distributor Inventory	Monthly w/in 30 days	YES/NO
FINANCIAL COVENANT	REQUIRED	ACTUAL
Minimum Adjusted
Tangible Net Worth	($2,000,000)	$ ______________
(Tested Monthly)
+25% of equity issued	______________	+ ______________
+25% of sub-debt incurred	______________	+ ______________
+25% of net income	______________	+ ______________
	Total	$ ______________

Silicon Valley Bank Loan and Security Agreement        

Complies?  YES/NO                

Terms are defined in the Schedule to the Loan Agreement, Section 5.1.

Comments regarding financial covenants:

COMDIAL CORPORATION

By:

Name:

Title:

Received:

By:

Name:

Title:

EX-10.37

Exhibit 10-37

LOAN MODIFICATION AGREEMENT

This Loan Modification Agreement is entered into as of November     , 2004, by and between COMDIAL CORPORATION, a Delaware corporation (“Borrower”), whose address is 106 Cattlemen Road, Sarasota, Florida 34232 and SILICON VALLEY BANK (“Bank”) whose address is 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office at 3353 Peachtree Road, NE, North Tower, Suite M-10, Atlanta, Georgia 30326.

1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, a Loan and Security Agreement, dated April 28, 2004, as may be amended from time to time (the “Loan Agreement”). The Loan Agreement provides for, among other things, a Committed Line in the original principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000) (the “Revolving Facility”). Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the “Indebtedness.”

2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement and an Intellectual Property Security Agreement dated April 28, 2004 executed by the Borrower in favor of Bank. Additionally, repayment of the Indebtedness is guaranteed by the domestic subsidiaries of Borrower (the “Guarantors”) pursuant to an Unconditional Guaranty dated as of April 28, 2004 from the Guarantors in favor of the Bank (the “Guaranty”) and further secured pursuant to the Security Agreement dated April 28, 2004 executed by the Guarantors in favor of Bank and by the Intellectual Property Security Agreement dated April 28, 2004 executed by the Guarantors in favor of Bank.

Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the “Security Documents”. Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the “Existing Loan Documents”.

3. DESCRIPTION OF CHANGE IN TERMS.

3.1 The Loan Agreement is hereby amended by deleting in its entirety clause (g) of Section 5.5 thereof and by substituting therefor a new clause (g) to read as follows:

(g) make any loans of any money or other assets or permit any of its Subsidiaries to do so, other than (i) intercompany loans from Borrower to a Guarantor or from a Guarantor to another Guarantor or to Borrower and (ii) that certain loan in the principal amount of $800,000 made by Borrower to eCommunications Systems Corporation on October 1, 2004;

3.2 The Loan Agreement is hereby amended by deleting the first paragraph of the Tangible Net Worth covenant set forth in Section 5 of the Schedule to the Loan Agreement:

Minimum Adjusted
Tangible Net Worth:	Borrower shall maintain an Adjusted Tangible Net Worth of not less than ($1,600,000) plus twenty-five percent (25%) of consolidated net income (without regard to any loss) from each fiscal quarter of Borrower, plus twenty-five percent (25%) of the net proceeds from any issuance by Borrower of equity or subordinate debt after the date of this Agreement.

4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of One Thousand Five Hundred Dollars ($1,500) (the “Loan Fee”) plus all out-of-pocket expenses.

6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness.

7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements.

CONDITIONS. The effectiveness of this Loan Modification Agreement is conditioned upon: (a) Borrower’s execution and delivery of this Loan Modification Agreement, (b) Borrower’s payment of the loan modification fee provided in Section 4 above and payment of all outstanding legal fees and expenses, (c) delivery by Borrower to Bank of the original promissory note executed by eCommunications Systems Corporation in favor of Borrower, together with a duly executed Allonge endorsing such promissory note to Bank as security for the Indebtedness and (d) such other instruments, documents and agreements as Bank or its counsel shall request.

This Loan Modification Agreement is executed as of the date first written above.

BORROWER:	BANK:
COMDIAL CORPORATION	SILICON VALLEY BANK
By:	By:
Name:	Name:
Title:	Title:

2

ACKNOWLEDGMENT OF GUARANTORS

The undersigned, the guarantors of the obligations of COMDIAL CORPORATION (“Borrower”) to SILICON VALLEY BANK (“Bank”) pursuant to that certain Unconditional Guaranty, dated as of April 28, 2004 (the “Guaranty”), hereby:

(a) acknowledge receipt of a copy of the forgoing certain Loan Modification Agreement executed and delivered by Borrower to Lender (the “Loan Modification”) and consent to, and agree to be bound by, the terms and conditions thereof;

(b) acknowledge and agree that all obligations of the Borrower under the Loan Modifications are included in the “Obligations,” as such term is defined in the Guaranty, and are guaranteed by the Guaranty; and

(c) acknowledge and agree that the Guaranty, the Security Documents to which they are a party and their obligations thereunder, remain in full force and effect, without release, diminution or impairment, notwithstanding the execution and delivery of the Loan Modification.

IN WITNESS WHEREOF, the undersigned have executed this Acknowledgement and Agreement under seal as of the      day of             , 200    .

COMDIAL ACQUISITION CORP.

By:

Name:

Title:

[CORPORATE SEAL]

COMDIAL BUSINESS

COMMUNICATIONS CORPORATION

By:

Name:

Title:

[CORPORATE SEAL]

COMDIAL TELECOMMUNICATIONS

INTERNATIONAL, INC.

By:

Name:

Title:

[CORPORATE SEAL]

3

COMDIAL ENTERPRISE SOLUTIONS, INC.

By:

Name:

Title:

[CORPORATE SEAL]

AURORA SYSTEMS, INC..

By:

Name:

Title:

[CORPORATE SEAL]

ARRAY TELECOM CORPORATION

By:

Name:

Title:

[CORPORATE SEAL]

KEY VOICE TECHNOLOGIES, INC.

By:

Name:

Title:

[CORPORATE SEAL]

4

COMDIAL REAL ESTATE CO., INC.

By:

Name:

Title:

[CORPORATE SEAL]

5

EX-10.38

Exhibit 10.38

SECOND LOAN MODIFICATION AGREEMENT

This Second Loan Modification Agreement is entered into as of November     , 2004, by and between COMDIAL CORPORATION, a Delaware corporation (“Borrower”), whose address is 106 Cattlemen Road, Sarasota, Florida 34232 and SILICON VALLEY BANK (“Bank”) whose address is 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office at 3353 Peachtree Road, NE, North Tower, Suite M-10, Atlanta, Georgia 30326.

1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, a Loan and Security Agreement, dated April 28, 2004, as may be amended from time to time (the “Loan Agreement”). The Loan Agreement provides for, among other things, a Committed Line in the original principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000) (the “Revolving Facility”). Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the “Indebtedness.”

2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement and an Intellectual Property Security Agreement dated April 28, 2004 executed by the Borrower in favor of Bank. Additionally, repayment of the Indebtedness is guaranteed by the domestic subsidiaries of Borrower (the “Guarantors”) pursuant to an Unconditional Guaranty dated as of April 28, 2004 from the Guarantors in favor of the Bank (the “Guaranty”) and further secured pursuant to the Security Agreement dated April 28, 2004 executed by the Guarantors in favor of Bank and by the Intellectual Property Security Agreement dated April 28, 2004 executed by the Guarantors in favor of Bank.

Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the “Security Documents”. Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the “Existing Loan Documents”.

3. DESCRIPTION OF CHANGE IN TERMS.

3.1 The Loan Agreement is hereby further amended by deleting in its entirety the first paragraph of Section 1 of the Schedule to the Loan Agreement and by substituting therefor a first paragraph to read as follows:

An amount not to exceed the (a) lesser of (i) $2,500,000 at any one time outstanding (the “Maximum Credit Limit”) or (ii) the sum of (A) 75% (the “Advance Rate”) of the amount of Borrower’s Eligible Accounts plus (B) during the period from November 24, 2004 through March 31, 2005, 50% of cash on deposit with Silicon or its Affiliates in which Silicon has a first priority perfected security interest; provided, however, that the aggregate amount advanced pursuant to clause (B) may not exceed $1,000,000, minus (b) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), minus (c) all amounts for services utilized under the Cash Management Services Sublimit.

4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of One Thousand Five Hundred Dollars ($1,500) (the “Loan Fee”) plus all out-of-pocket expenses.

6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness.

7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements.

8. CONDITIONS. The effectiveness of this Loan Modification Agreement is conditioned upon: (a) Borrower’s execution and delivery of this Loan Modification Agreement, (b) Borrower’s payment of the loan modification fee provided in Section 4 above and payment of all outstanding legal fees and expenses, (c) delivery by Borrower to Bank of the original promissory note executed by eCommunications Systems Corporation in favor of Borrower and (d) such other instruments, documents and agreements as Bank or its counsel shall request.

This Loan Modification Agreement is executed as of the date first written above.

BORROWER:	BANK:
COMDIAL CORPORATION	SILICON VALLEY BANK
By:	By:
Name:	Name:
Title:	Title:

2

ACKNOWLEDGMENT OF GUARANTORS

The undersigned, the guarantors of the obligations of COMDIAL CORPORATION (“Borrower”) to SILICON VALLEY BANK (“Bank”) pursuant to that certain Unconditional Guaranty, dated as of April 28, 2004 (the “Guaranty”), hereby:

(a) acknowledge receipt of a copy of the forgoing certain Second Loan Modification Agreement executed and delivered by Borrower to Lender (the “Loan Modification”) and consent to, and agree to be bound by, the terms and conditions thereof;

(b) acknowledge and agree that all obligations of the Borrower under the Loan Modifications are included in the “Obligations,” as such term is defined in the Guaranty, and are guaranteed by the Guaranty; and

(c) acknowledge and agree that the Guaranty, the Security Documents to which they are a party and their obligations thereunder, remain in full force and effect, without release, diminution or impairment, notwithstanding the execution and delivery of the Loan Modification.

IN WITNESS WHEREOF, the undersigned have executed this Acknowledgement and Agreement under seal as of the      day of November, 2004.

COMDIAL ACQUISITION CORP.

By:

Name:

Title:

[CORPORATE SEAL]

COMDIAL BUSINESS

COMMUNICATIONS CORPORATION

By:

Name:

Title:

[CORPORATE SEAL]

COMDIAL TELECOMMUNICATIONS

INTERNATIONAL, INC.

By:

Name:

Title:

[CORPORATE SEAL]

3

COMDIAL ENTERPRISE SOLUTIONS, INC.

By:

Name:

Title:

[CORPORATE SEAL]

AURORA SYSTEMS, INC..

By:

Name:

Title:

[CORPORATE SEAL]

ARRAY TELECOM CORPORATION

By:

Name:

Title:

[CORPORATE SEAL]

KEY VOICE TECHNOLOGIES, INC.

By:

Name:

Title:

[CORPORATE SEAL]

4

COMDIAL REAL ESTATE CO., INC.

By:

Name:

Title:

[CORPORATE SEAL]

5

EX-10.39

Exhibit 10.39

THIRD LOAN MODIFICATION AND FORBEARANCE AGREEMENT

This Loan Modification and Forbearance Agreement (this “Agreement”) is entered into as of March 17, 2005, by and between COMDIAL CORPORATION, a Delaware corporation (“Borrower”), whose address is 106 Cattlemen Road, Sarasota, Florida 34232 and SILICON VALLEY BANK (“Bank”) whose address is 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office at 3353 Peachtree Road, NE, North Tower, Suite M-10, Atlanta, Georgia 30326.

1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, a Loan and Security Agreement, dated April 28, 2004, as may be amended from time to time (the “Loan Agreement”). The Loan Agreement provides for, among other things, a Committed Line in the original principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000) (the “Revolving Facility”). Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the “Indebtedness.”

2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement and an Intellectual Property Security Agreement dated April 28, 2004 executed by the Borrower in favor of Bank. Additionally, repayment of the Indebtedness is guaranteed by the domestic subsidiaries of Borrower (the “Guarantors”) pursuant to an Unconditional Guaranty dated as of April 28, 2004 from the Guarantors in favor of the Bank (the “Guaranty”) and further secured pursuant to the Security Agreement dated April 28, 2004 executed by the Guarantors in favor of Bank and by the Intellectual Property Security Agreement dated April 28, 2004 executed by the Guarantors in favor of Bank.

Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the “Security Documents”. Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the “Existing Loan Documents”.

3. FORBEARANCE. Bank agrees to forebear until March 31, 2005 (the “Forbearance Period”) from exercising its rights and remedies under the Existing Loan Documents and under applicable law (“Default Rights”), notwithstanding Borrower’s existing default under the Loan Agreement as a result of Borrower’s failure to maintain the minimum Adjusted Tangible Net Worth required by Section 5 of the Schedule to the Loan Agreement (the foregoing being referred to as the “Existing Default”). The Existing Loan Documents, as modified by this Agreement are hereinafter collectively called the “Loan Documents”).

By signing below, Borrower acknowledges that it is currently in default and as a result of such default, Bank is entitled to exercise the Default Remedies. Nothing in this Agreement in any way shall constitute Bank’s waiver of Borrower’s Existing Default. Borrower further agrees that the exercise of any Default Rights by Bank upon termination of the Forbearance Period shall not be affected by reason of this Agreement, and the Borrower shall not assert as a defense thereto the passage of time, estoppel, laches or any statute of limitations to the extent that the exercise of any Default Rights was precluded by this Agreement.

The Forbearance Period shall be immediately terminated, without notice, if (a) Borrower breaches of any of the terms set forth in this Agreement, (b) the occurrence of any default (other than the Existing Default) under the Existing Loan Documents, or (c) if any recital, representation or warranty made herein, in any document executed and delivered in connection herewith, or in any report, certificate, financial statement or other instrument or document previously, now or hereafter furnished by or on behalf of the Borrower in connection with this Agreement or any other document executed and delivered in connection with this Agreement, shall prove to have been false, incomplete or misleading in any material respect on the date as of which it was made (collectively, a “Default”), whereupon Bank, at its option, without any notice to Borrower, may immediately cease making any Loans and may immediately exercise any Default Remedies.

Upon termination of the Forbearance Period described above, without any notice to Borrower, Bank may exercise any remedies available to Bank under the Loan Documents and under applicable law. In addition, Bank’s agreement to continue to forbear from enforcing its remedies under the Existing Loan Documents until the end of the Forbearance Period, notwithstanding Borrower’s Existing Default under the Existing Loan Documents, (a) in no way shall be deemed an agreement by Bank to waive Borrower’s compliance with all other terms of the Existing Loan Documents, as modified by this Agreement and (b) shall not limit or impair Bank’s right to demand strict performance of all other terms and covenants as of any date.

4. DESCRIPTION OF CHANGE IN TERMS.

4.1 Modification to Loan Agreement. The Loan Agreement is hereby amended by deleting in its entirety the first paragraph of Section 1 of the Schedule to the Loan Agreement and by substituting therefor a first paragraph to read as follows:

An amount not to exceed the (a) lesser of (i) $2,500,000 at any one time outstanding (the “Maximum Credit Limit”) or (ii) the sum of (A) 75% (the “Advance Rate”) of the amount of Borrower’s Eligible Accounts plus (B) during the period from November 24, 2004 through March 18, 2005, 50% of cash on deposit with Silicon or its Affiliates in which Silicon has a first priority perfected security interest; provided, however, that the aggregate amount advanced pursuant to clause (B) may not exceed $1,000,000, minus (b) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), minus (c) all amounts for services utilized under the Cash Management Services Sublimit.

5. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

6. PAYMENT OF FORBEARANCE FEE. Borrower shall pay to Bank a fee in the amount of Two Thousand Five Hundred Dollars ($2,500) (the “Forbearance Fee”) plus all out-of-pocket expenses.

7. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that, as of the date hereof, it has no defenses against the obligations to pay any amounts under the Indebtedness. The Borrower acknowledges and warrants that Bank has acted in good faith and has conducted in a commercially reasonable manner its relationships with Borrower in connection with this Agreement and in connection with the Loan Documents, including the Loan Agreement and the Indebtedness, the Borrower hereby waives and releases any claims to the contrary.

8. WAIVER AND RELEASE OF CLAIMS.

(a) Borrower and each Guarantor signing below (each of the foregoing being a “Releasing Party”) hereby releases, acquits, and discharges Bank and Bank’s employees, agents, representative, consultants, attorneys, fiduciaries, servants, officers, directors, partners, predecessors, successors and assigns, subsidiary corporations, parent corporations, and related corporate divisions (all of the foregoing hereinafter called the “Released Parties”), from all actions and causes of action, judgments, executions, suits, debts, claims, demands, liabilities, obligations, damages, and expenses of any and every character, known or unknown, direct and/or indirect, at law or in equity, of whatsoever kind or nature, whether heretofore or hereafter arising, for or because of any matter or things done, omitted or suffered to be done by any of the Released Parties prior to and including the date of execution hereof, and in any way directly or indirectly arising out of or in any way connect to this Agreement and the Existing Loan Documents, including, but not limited to, claims relating to any settlement negotiation (all of the foregoing hereinafter called the “Released Matters”). Each Releasing Party acknowledges that the agreements in this section are intended to be in full satisfaction of all or any alleged injuries or damages arising in connection with the Released Matters.

2

(b) Each Releasing Party acknowledges that it has not relied, in executing the release set forth in this section, upon any representations, warranties, or conditions by Bank or any other entity except as are specifically set forth in this Agreement.

(c) Nothing contained herein shall be construed at any time as an admission by Bank of any liability to Borrower or any other entity.

(d) Each Releasing Party warrants to Bank that it has not purported to transfer, assign, or otherwise convey any right, title or interest of such Releasing Party in any Released Matter to any other entity, and that the foregoing constitutes a full and complete release of all Released Matters.

9. CONTINUING VALIDITY. Borrower (and each Guarantor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Indebtedness pursuant to this Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Agreement. The terms of this Paragraph apply not only to this Agreement, but also to all subsequent loan modification agreements.

10. INTEGRATION. This Agreement, together with the Existing Loan Documents, constitutes the entire agreement and understanding among the parties relating to the subject matter hereof, and supersedes all prior and contemporaneous proposals, negotiations, agreements, and understandings relating to the subject matter. In entering into this Agreement, Borrower acknowledges that it is relying on no statement, representation, warranty, covenant, or agreement of any kind made by the Bank or any employee or agent of Bank, except for the agreements of Bank set forth herein. No modification, rescission, waiver, release, or amendment of any provision of this Agreement shall be made, except by a written agreement signed by Bank and Borrower.

11. GOVERNING LAW, HEADINGS. This Agreement is one of the Loan Documents defined in the Loan Agreement and shall be governed and construed in accordance with the laws of the State of Georgia. The headings and captions in this Agreement are for the convenience of the parties only and are not a part of this Agreement.

12. CONDITIONS. The effectiveness of this Agreement is conditioned upon: (a) the execution and delivery of this Agreement by the Borrower and each Guarantor, (b) Borrower’s payment of the forbearance fee provided in Section 6 above and payment of all outstanding legal fees and expenses, and (c) such other instruments, documents and agreements as Bank or its counsel shall request.

This Agreement is executed as of the date first written above.

BORROWER:	BANK:
COMDIAL CORPORATION	SILICON VALLEY BANK
By:	By:
Name:	Name:
Title:	Title:

3

ACKNOWLEDGMENT OF GUARANTORS

The undersigned, the guarantors of the obligations of COMDIAL CORPORATION (“Borrower”) to SILICON VALLEY BANK (“Bank”) pursuant to that certain Unconditional Guaranty, dated as of April 28, 2004 (the “Guaranty”), hereby:

(a) acknowledge receipt of a copy of the forgoing certain Third Modification and Forbearance Agreement executed and delivered by Borrower to Bank (the “Loan Modification”) and consent to, and agree to be bound by, the terms and conditions thereof;

(b) acknowledge and agree that all obligations of the Borrower under the Loan Modifications are included in the “Obligations,” as such term is defined in the Guaranty, and are guaranteed by the Guaranty; and

(c) acknowledge and agree that the Guaranty, the Security Documents to which they are a party and their obligations thereunder, remain in full force and effect, without release, diminution or impairment, notwithstanding the execution and delivery of the Loan Modification.

IN WITNESS WHEREOF, the undersigned have executed this Acknowledgement and Agreement under seal as of the 17^th day of March, 2005.

COMDIAL ACQUISITION CORP.

By:

Name:

Title:

[CORPORATE SEAL]

COMDIAL BUSINESS

COMMUNICATIONS CORPORATION

By:

Name:

Title:

[CORPORATE SEAL]

COMDIAL TELECOMMUNICATIONS

INTERNATIONAL, INC.

By:

Name:

Title:

[CORPORATE SEAL]

4

COMDIAL ENTERPRISE SOLUTIONS, INC.

By:

Name:

Title:

[CORPORATE SEAL]

AURORA SYSTEMS, INC..

By:

Name:

Title:

[CORPORATE SEAL]

ARRAY TELECOM CORPORATION

By:

Name:

Title:

[CORPORATE SEAL]

KEY VOICE TECHNOLOGIES, INC.

By:

Name:

Title:

[CORPORATE SEAL]

5

COMDIAL REAL ESTATE CO., INC.

By:

Name:

Title:

[CORPORATE SEAL]

6

EX-21.1

Exhibit 21.1

Subsidiaries of the Registrant

The following are the subsidiaries of the Registrant and all are incorporated in the state of Delaware, except as otherwise indicated:

Array Telecom Corporation

Aurora Systems, Inc.

Comdial Business Communications Corporation

Comdial Enterprise Systems, Inc.

Comdial Real Estate Co., Inc.(incorporated in the State of Maryland)

Comdial Telecommunications International, Inc.

Key Voice Technologies, Inc.

Comdial Acquisition Corporation

69

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-53562 and 333-50124) pertaining to the 1992 Stock Incentive Plan and Comdial Corporation 401(k) Plan, respectively, and the Registration Statement (Form S-1 No. 333-103182) pertaining to the Prospectus of Comdial Corporation for the registration of 9,048,439 shares of its common stock, of our report dated February 18, 2005, except for Notes 1, 2 and 8, as to which the date is March 31, 2005, with respect to the consolidated financial statements and schedule of Comdial Corporation as of and for the year ended December 31, 2004, included in the Annual Report (Form 10-K) for the year ended December 31, 2004.

	/s/ Aidman Piser & Company, P.A.
Tampa, Florida
April 13, 2005

70

EX-23.2

Exhibit 23.2

Consent of Independent Registered Certified Public Accountants

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-53562 and 333-50124) pertaining to the 1992 Stock Incentive Plan and Comdial Corporation 401(k) Plan, respectively, and the Registration Statement (Form S-1 No. 333-103182) pertaining to the Prospectus of Comdial Corporation for the registration of 9,048,439 shares of its common stock, of our report dated March 15, 2004, with respect to the consolidated financial statements and schedule of Comdial Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 2004.

	/s/ Ernst & Young LLP
Tampa, Florida
April 13, 2005

71

EX-24.1

Exhibit 24.1

POWER OF ATTORNEY

I, Michael S. Falk, a duly elected Director of Comdial Corporation, a Delaware corporation, do hereby constitute and appoint Kenneth M. Clinebell and Anne Prillaman, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of Comdial), to sign Comdial’s Annual Report on Form 10-K for the year ended December 31, 2004, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. This power of attorney shall not terminate upon my disability.

Dated:	03/26/05
	/s/ Michael S. Falk
	Michael S. Falk

72

EX-24.2

Exhibit 24.2

POWER OF ATTORNEY

I, Inder Tallur, a Director of Comdial Corporation, a Delaware corporation, do hereby constitute and appoint Kenneth M. Clinebell and Anne Prillaman, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of Comdial), to sign Comdial’s Annual Report on Form 10-K for the year ended December 31, 2004, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. This power of attorney shall not terminate upon my disability.

Dated:	03/26/05
	/s/ Inder Tallur
	Inder Tallur

73

EX-31.1

Exhibit 31.1

CERTIFICATIONS

In connection with the Annual Report on Form 10-K of Comdial Corporation (the “Company”) for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof, I, Neil P. Lichtman, 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 Annual Report on Form 10-K of Comdial Corporation;

(2) Based on my knowledge, this 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 report;

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

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: April 14, 2005

By:	/s/ Neil P. Lichtman
	Neil P. Lichtman
	President, Chief Executive Officer
	and Director

74

EX-31.2

Exhibit 31.2

CERTIFICATIONS

In connection with the Annual Report on Form 10-K of Comdial Corporation (the “Company”) for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof, I, Kenneth M. Clinebell, Chief Operating Officer, Chief Financial Officer and Senior Vice President 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 Annual Report on Form 10-K of Comdial Corporation;

(2) Based on my knowledge, this 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 report;

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

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: April 14, 2005

By:	/s/ Kenneth M. Clinebell
	Kenneth M. Clinebell
	Chief Operating Officer, Chief Financial Officer and Senior Vice President

75

EX-32.1

Exhibit 32.1

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 Annual Report of Comdial Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Neil P. Lichtman, 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: April 14, 2005	By:	/s/ Neil P. Lichtman
		Neil P. Lichtman
		President, Chief Executive Officer
		and Director

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

76

EX-32.2

Exhibit 32.2

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 Annual Report of Comdial Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenneth M. Clinebell, Chief Operating Officer, Chief Financial Officer and Senior Vice President 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: April 14, 2005	By:	/s/ Kenneth M. Clinebell
		Kenneth M. Clinebell
		Chief Operating Officer, Chief Financial Officer and
		Senior Vice President

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

77