Vertical Xcelerator IP™ Wins 2007 TMC Labs Innovation Award
CAMBRIDGE, Mass., February 21, 2008 – Vertical Communications (VRCC.OB) (“Vertical”), a leading provider of next-generation, IP-based phone systems and applications that help businesses better serve their customers, announced today its financial results for the second quarter of fiscal 2008, which ended December 31, 2007.

For the second quarter of fiscal 2008, Vertical reported net revenue of $18.7 million, compared to net revenue of $18.1 million during the same quarter of fiscal 2007, an increase of 3%. For the six months ended December 31, 2007, Vertical reported net revenue of $38.4 million, compared to net revenue of $34.0 million during the six months ended December 31, 2006.  The increase in revenue is attributable to the acquisition of Vodavi Technology, Inc. (“Vodavi”), which was completed on December 1, 2006. 

Cost of sales for the second quarter of fiscal 2008 was $10.1 million, compared to $9.4 million during the same quarter of fiscal 2007, an increase of 7%.  For the six months ended December 31, 2007, cost of sales was $20.8 million, compared to cost of sales of $17.2 million during the six months ended December 31, 2006.

Gross profit for the second quarter of fiscal 2008 (46% of net revenue) and the second quarter of fiscal 2007 (48% of net revenue) was $8.7 million.  For the six months ended December 31, 2007, gross profit was $17.6 million (46% of net revenue), compared to $16.8 million (49% of net revenue)  for the same period in fiscal 2006.  The decrease in gross profit percentage is primarily attributable to the acquisition of Vodavi, whose products yield a lower gross profit than other Vertical product lines.

Operating expenses for the second quarter of fiscal 2008 were $13.4 million, compared to $11.0 million during the same quarter in fiscal 2007, an increase of 22%.  Operating expenses for the six months ended December 31, 2007 were $26.7 million compared to $22.1 million for the same period in fiscal 2006, an increase of 21%. This increase in operating expenses for both periods under review is attributable to the acquisition of Vodavi operations and to increased non-cash compensation charges related to stock option and restricted stock grants as discussed below, offset by a decrease in overall operating expenses from elimination of redundancies related to the acquisition of the operations of Vodavi.  Operating expenses include non-cash compensation charges relating to stock options and restricted stock grants of $1.7 million and $3.3 million, respectively, for the three and six months ended December 31, 2007 compared to $1.0 million $2.0 million, respectively for the same periods of fiscal 2007. Additionally, operating expenses include accruals for liquidated damages associated with certain shareholder-related registration right obligations of $0 for the three and six months ended December 31, 2007 compared to $0 and $0.6 million, respectively, for the same periods in fiscal 2007.

Loss from operations for the second quarter of fiscal 2008 was $4.8 million compared to $2.3 million for the same quarter of fiscal 2007.  Loss from operations for the six months ended December 31, 2007 was $9.1 million compare to $5.3 million for the same period of fiscal 2007.

Interest expense for the three and six months ended December 31, 2007 was $0.7 million and $1.4 million, respectively, compared with $1.2 million and $1.4 million, respectively, for the three and six months ended December 31, 2006.

Vertical reported GAAP net loss to common shareholders for the second quarter of fiscal 2008 of $6.5 million, or $0.13 cents per share, compared to GAAP net loss to common shareholders of $3.9 million, or $0.08 cents per share, during the same quarter of fiscal 2007.   For the six months ended December 31, 2007, Vertical reported GAAP net loss to common shareholders of $11.8 million, or $0.23 cents per share, compared to GAAP net loss to common shareholders of $7.4 million, or $0.16 cents per share for the same period in fiscal 2007.

GAAP net loss includes the impact of non-cash compensation charges, liquidated damages provisions and amortization related to intangible assets acquired in the acquisitions of Vertical Networks, Inc., Comdial Corporation and Vodavi.

Vertical’s cash and cash equivalents (including restricted cash), deferred revenue, total liabilities and shareholders’ equity balances at December 31, 2007 were $3.6 million, $13.0 million, $61.0 million and $30.6 million, respectively.