Vertical Growth Accelerates

2006 Second Quarter Revenue up 247%

CAMBRIDGE, Mass. (February 22, 2006) -- Vertical Communications (ASFT.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 2006, which ended December 31, 2005.

For the second quarter of fiscal 2006, Vertical reported net revenue of $16.3 million, compared to net revenue of $4.7 million during the same quarter of fiscal 2005, an increase of 247%. Net revenue for the second quarter was also up 65% from $9.9 million reported in the first quarter of fiscal 2006 primarily as the result of the acquisition of Comdial Corporation.

Vertical deferred a very high percentage of its bookings during fiscal 2005 as a result of acquiring several related major contracts which included multi-year software subscriptions. The company will amortize the deferred revenue over the balance of the term of the related software subscriptions. Vertical anticipates that future contracts will result in a continued lower rate of deferral. Total deferred revenue as of December 31, 2005 is $20.9 million.

Gross profit for the second quarter of fiscal 2006 was $7.9 million, up 111% from $3.7 million in the same quarter of fiscal 2005, and up 26% from $6.2 million in the first quarter of fiscal 2006.

Operating expenses for the second quarter were $12.8 million, compared to $7.5 million during the same quarter in fiscal 2005, an increase of 71%, and up 35% from $9.5 million in the first quarter of 2006 primarily as a result of the acquisition of Comdial Corporation.

Both the second quarters of fiscal 2006 and 2005 statement of operations include non-cash compensation charges relating to stock options. Operating expenses for the second quarter of 2006 includes $1.0 million compared to $0.6 million for the second quarter of fiscal 2005 and $1.2 million in the first quarter of 2006.

Vertical reported a net loss to common shareholders for the second quarter of fiscal 2006 of $5.4 million, or 12 cents per share, compared to a net loss of $3.8 million, or 11 cents per share, during the same quarter of fiscal 2005 and to a net loss of $3.4 million or 10 cents per share in the first quarter of fiscal 2006.

“We continue to be excited about our vision of helping customers transform phone systems and voice applications from expense items to business intelligence weapons that help organizations deliver exceptional customer service, dramatically reduce communications costs and significantly improve the operational efficiencies of their businesses. Earlier this month, we raised $5 million of additional equity capital from M/C Venture Partners, Pathfinder Ventures and a group led by Greenway Capital to further enhance our cash position and to continue aggressively funding our product development roadmap,” said Bill Tauscher, Vertical’s Chairman and Chief Executive Officer.

Vertical reports its financial results in accordance with generally accepted accounting principals (“GAAP”). However, we believe that in certain circumstances, non-GAAP financial measures can prove useful for investors. Under GAAP, revenue and related cost of goods associated with certain contracts are recognized and amortized over the balance of the life of the software subscription agreements. These agreements run through periods of up to three and a half years. Non-GAAP revenue for the second quarter of 2006 reflects a $1.1 million reduction of revenue and a $0.7 million reduction of related cost of goods resulting from the GAAP amortization of systems-related revenue and cost of goods deferred in prior periods. In addition, Vertical acquired $8.6 million of intangible assets as part of the Vertical Networks and Comdial Corporation acquisitions, which are being amortized over estimated lives of up to ten-years.

We have prepared the following non-GAAP presentation of the condensed statement of operations information to reflect the results of our operations without this GAAP-based revenue and cost of sales deferral, including its related amortization, and without the amortization of acquired intangible assets and related deferred tax liability. While this non-GAAP presentation should not be considered in isolation or as a substitute for net revenue, cost of sales, gross margins, operating expense, income (loss), or net income (loss) data prepared in accordance with GAAP or as an indication of the Company’s financial performance or liquidity under GAAP, it is presented here because the Company believes that it provides useful information to investors with respect to its ability to generate sales of its products into the market absent the deferral convention for accounting purposes (i.e. sell through sales), and to meet current and future working capital requirements and capital expenditure commitments by adjusting out the non-cash operating expense amortization and associated deferred tax expense. Management tracks these non-GAAP measures and uses them, along with certain GAAP financial information, to assess the effectiveness of its operations. 

About Vertical

Vertical Communications, Inc. is a leading provider of next-generation IP-based voice and data communications systems for business. Vertical combines voice and data technologies with business process understanding to deliver integrated IP-PBX and application solutions that enhance customer service and business productivity. Vertical’s customers are leading companies of all sizes – from small to large and distributed – and include CVS/pharmacy, Household International and Apria Healthcare. Vertical is headquartered in Cambridge, Mass. and delivers its solutions through a worldwide network of systems integrators, resellers and distributors. For more information, please visit the company’s Website at www.vertical.com.