2006 Third Quarter Revenue up 244%

CAMBRIDGE, Mass. (May 18, 2006) --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 third quarter of fiscal 2006, which ended March 31, 2006.

For the third quarter of fiscal 2006, Vertical reported net revenue of $14.4 million, compared to net revenue of $4.2 million during the same quarter of fiscal 2005, an increase of 244%. The increase is primarily as a result of the acquisition of the operations of Comdial Corporation on September 27, 2005, which revenue Vertical has successfully maintained since the acquisition.

Vertical deferred a high percentage of its bookings during fiscal 2006 and 2005 as a result of acquiring several related major contracts that included multi-year software subscriptions. Vertical will amortize the deferred revenue over the balance of the term of the related software subscriptions. Total deferred revenue as of March 31, 2006 is $21.7 million.

Gross profit for the third quarter of fiscal 2006 was $7.8 million, up 139% from $3.3 million in the same quarter of fiscal 2005, primarily as a result of the acquisition of the operations of Comdial Corporation.

Operating expenses for the third quarter were $11.5 million, compared to $8.6 million during the same quarter in fiscal 2005, an increase of 34%, primarily as a result of the acquisition of the operations of Comdial Corporation. Vertical has, as of April 2006, completed the full integration of all aspects of the Comdial organization, systems, operations and business partners. Significant operating cost savings will be realized in the future due to the synergies achieved and the cessation of one-time integration costs.

The statements of operations for both the third quarters of fiscal years 2006 and 2005 include non-cash compensation charges relating to stock options. Operating expenses for the third quarter of 2006 includes $0.9 million compared to $0.6 million for the third quarter of fiscal 2005.

Vertical reported a net loss to common shareholders for the third quarter of fiscal 2006 of $4.1 million, or 9 cents per share, compared to a net loss of $5.4 million, or 16 cents per share, during the same quarter of fiscal 2005.

“Our third quarter growth clearly signals that Vertical’s solutions are meeting customer needs. We are investing heavily in the development of our next-generation platform that will integrate all our product platforms into a single system family, utilizing the strengths from each platform we have acquired and providing a greater value with a migration path that will give investment protection for each,” said Bill Tauscher, Vertical’s Chairman and Chief Executive Officer. “Having completed the Comdial acquisition and integration, we are already benefiting from a more streamlined business operation and an integrated focus. We expect to realize even greater savings in the future. With our current products, our new product releases in the works and a larger, more robust channel, Vertical has never been better positioned for future growth and success.”

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 of the past quarter reflect a significant deferral of $2.5 million of revenue for systems sold and delivered during the quarter, as these systems relate to multi-year software subscription agreements. Under GAAP, this revenue and related cost of goods of $1.3 million will be 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. Net revenue for the third quarter of 2006 also reflects $1.3 million of revenue and $0.8 million of related cost of goods resulting from the 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 for GAAP purposes. Vertical also recognized non-cash compensation charges associated with stock options of $0.9 million during the third quarter of fiscal 2006 for GAAP purposes.

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, without the amortization of acquired intangible assets and related deferred tax liability, and without the non-cash compensation charges associated with stock options. 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 and the non-cash compensation charges associated with stock options. Management tracks these non-GAAP measures and uses them, along with certain GAAP financial information, to assess the effectiveness of its operations.