2006 First Quarter Revenue up 241%

CAMBRIDGE, Mass. (November 17, 2005) -- 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 first quarter of fiscal 2006, which ended September 30, 2005.

For the first quarter of fiscal 2006, Vertical reported revenue of $9.9 million, compared to revenue of $2.9 million during the same quarter of fiscal 2005, an increase of 241%. Revenue for the first quarter was also up 74% from $5.7 million of revenue reported in the fourth quarter of fiscal 2005 primarily as the result of a significant decrease in bookings deferred from the quarter. Revenue also increased by $0.4 million as a result of the acquisition of Comdial Corporation. While the acquisition only contributed three days of revenue during the first quarter, Vertical expects revenue from the acquisition to roughly double revenue for the company during second quarter.

The Company announced the acquisition of Comdial Corporation on September 28, 2005. The combination of Vertical and Comdial has created a significant player in the phone systems and voice applications marketplace, with the momentum to make a greater impact on the IP telephony space. The combined company has shipped more than 400,000 traditional and IP-PBX phone systems, and now features more than 270 employees in five principal locations in the United States and EMEA, and an active channel of more than 1,100 value-added resellers, distributors and systems integrators worldwide.

Vertical deferred a very high percentage of its bookings during fiscal 2005 as a result of acquiring several related major contracts including several multi-year software subscriptions last year. Deferred revenue balances remained essentially unchanged during the quarter, compared to an increase of $3.7 million during the prior quarter. Total deferred revenue now stands at $20.3 million. 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.

Gross profit for the quarter was $6.2 million, up 138% from $2.6 million in the same quarter of fiscal 2005, and up 32% from $4.7 million in the fourth quarter.

Operating expenses for the first quarter were $9.5 million, compared to $9.6 million during the previous quarter, an decrease of 1%. The decrease reflects reduced product development costs related to the release of several new products, including TeleVantage 7, which was released in September.

Both quarters reflect non-cash compensation charges relating to stock options. The fourth quarter of fiscal 2005 operating expenses included $0.6 million as determined under APB 25. On July 1, 2005 Vertical adopted FAS 123R, and the first quarter of fiscal 2006 operating expenses includes $1.2 million in non-cash compensation as determined under FAS 123R

Vertical reported a net loss to common shareholders for the quarter of $3.4 million, or 10 cents per share, compared to a net loss of $2.9 million, or 61 cents per share, during the same quarter of fiscal 2005.

“We’re very excited about the impact that combining Comdial’s extensive dealer networks with our technology and products will have. We still expect to see further positive impact from the evolving combination of our InstantOffice and TeleVantage products and technologies. The integration of those two businesses is nearing completion and the impact on profitability should be seen in the coming quarters. Now, with the completion of the Comdial acquisition, Vertical is even better positioned to pursue 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 efficiency of their businesses.” said Bill Tauscher, Vertical’s Chairman and CEO.

The Company ended the quarter with $4.7 million in cash, a decrease of $0.1 million during the quarter.

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. For example, the results for the past quarter reflect a deferral of $0.6 million of revenue for systems sold and delivered during the quarter, because these systems are related to multi-year software subscription agreements. Under GAAP, this revenue and related cost of goods of $0.3 million will be recognized as 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. Net revenue for the period also reflects $1.2 million of revenue and $0.7 million of cost of goods resulting from the amortization of systems-related revenue and cost of goods deferred in prior periods. In addition, Vertical acquired $4.3 million of intangible assets as part of the Vertical Networks acquisition, which are being amortized over an estimated life of five-years.

We have prepared the following non-GAAP presentation of condensed income statement information to reflect the results of operations without this revenue and cost of sales deferral, including its related amortization, and without the amortization of acquired intangible assets and a 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 amortization and tax expense. Management intends to track these non-GAAP measures going forward, and use them, along with GAAP financial information, to assess the effectiveness of its operations.

Non-GAAP net revenue of $9.3 million represents products delivered and accepted by our customers during the period, and represents a 221% increase over the pro forma revenues for the same period in the prior year.

Non-GAAP operating expenses for the quarter were $7.7 million, excluding the non-cash charge for the amortization of acquired intangible assets of $179 thousand, non-cash settlement of liquidated damages to certain investors of $550 thousand, and the charge for non-cash compensation under FAS 123R, compared to $4.0 million in GAAP operating expenses during the first quarter of fiscal 2005. The increase of $3.7 million for the quarter was primarily the result of operating expense related to the acquired operations of Vertical Networks, and increased levels of activity in sales and marketing.

Non-GAAP net loss for the quarter was $1.6 million, reflecting the non-GAAP adjustments discussed above, as well as the elimination of $84 thousand of tax expense related to deferred taxes on the amortization of goodwill from the acquisitions.

Non-GAAP gross margin during the quarter was 66% as compared to the GAAP gross margin of 88% for the first quarter of fiscal 2005. Non-GAAP cost of sales of $3.2 million represents the cost of products delivered and accepted by our customers, and represents a $2.8 million increase in cost of products, primarily resulting from the cost of hardware shipped with products acquired from Vertical Networks.

Vertical will hold a conference call at 5:00 p.m. ET today to discuss the first quarter fiscal year 2006 financial results. The conference call will be broadcast live via the Internet at the Investor Relations section of Vertical's Website, http://www.vertical.com/corpcalls.html.

A recorded replay of the conference call will be available 24 hours per day beginning on Thursday, November 17, 2005 at 8:00 p.m. EDT at the Investor Relations section of Vertical's Website, http://www.vertical.com/corpcalls.html.