Vertical Announces Second Quarter Financial Results

CAMBRIDGE, Mass. (Feb. 15, 2007) ¯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 2007, which ended December 31, 2006.

For the second quarter of fiscal 2007, Vertical reported net revenue of $18.1 million, compared to net revenue of $16.3 million during the same quarter of fiscal 2006, an increase of 11%. The increase is primarily attributable to the acquisition of Vodavi Technology, Inc. (“Vodavi”), which was completed on December 1, 2006. For the six months ended December 31, 2006, Vertical reported net revenue of $34.0 million, compared to net revenue of $26.2 million during the same period in fiscal 2006, an increase of 30%. The increase for the six month period is attributable to both the acquisition of Vodavi and the acquisition of Comdial Corporation (“Comdial”) which occurred on September 28, 2005.

Vertical deferred a portion of its product shipments during fiscal 2007, 2006 and 2005 as a result of its acquisition of Vertical Networks, Inc. in September 2004, in which several related major contracts that included multi-year software subscriptions were acquired. Vertical will amortize the deferred revenue over the balance of the term of the related software subscriptions. During the second quarter of fiscal 2007, Vertical recognized $1.7 million of revenue related to prior period product shipments compared with recognition of $1.1 million of revenue related to prior period product shipments for the same quarter in 2006. For the six months ended December 31, 2006, and December 31, 2005, Vertical recognized $1.8 million and $1.7 million, respectively, of revenue related to prior period product shipments. Total deferred revenue as of December 31, 2006 was $20.2 million.

Gross profit for the second quarter of fiscal 2007 was $8.7 million, up 10% from $7.9 million in the same quarter of fiscal 2006, primarily as a result of the acquisition of Vodavi. For the six months ended December 31, 2006, gross profit was $16.8 million, up 19% from $14.1 million during the same period in fiscal 2006. As discussed above, during fiscal 2007, 2006 and 2005, certain product shipments were deferred. Gross margin recorded in the second fiscal quarter of 2007 associated with prior period shipments was $0.7 million compared to $0.5 million for the same quarter in 2006. Gross margin recorded for the six month periods ended December 31, 2006 and 2005 associated with prior period shipments was $0.6 million and $0.6 million, respectively.

Operating expenses for the second quarter were $11.0 million, compared to $12.8 million during the same quarter in fiscal 2006, a decrease of 14%, primarily as a result of the decline in overall operating expenses from elimination of redundancies related to the acquisition of the Comdial operations. Operating expenses for the six months ended December 31, 2006 were $22.1 million, compared to $22.3 million for the same period in fiscal 2006. Depreciation and amortization amounts included in operating expenses were $0.8 million for the second quarter of fiscal 2007 compared to $0.7 million for the same period in fiscal 2006. For the six months ended December 31, 2006 and 2005, depreciation and amortization amounts included in operating expenses were $1.5 million and $1.2 million, respectively.

Operating expenses also include non-cash compensation charges relating to stock options of $1.0 million for the second quarter of fiscal 2007 compared to $1.0 million for the second quarter of fiscal 2006. For the six months ended December 31, 2006 and 2005, non-cash compensation charges relating to stock options were $2.0 million and $2.2 million, respectively. Additionally, operating expenses included accruals for liquidated damages associated with certain shareholder-related registration right obligations of $0.4 million for the second quarter of fiscal 2007 compared to $0 for the same quarter in fiscal 2006. For the six months ended December 31, 2006 and 2005, accruals for liquidated damages were $1.0 million and $0.6 million, respectively.

Loss from operations for the second quarter of 2007 was $2.3 million compared to $4.9 million for the same quarter of fiscal 2006. Loss from operations for the six months ended December 31, 2006 and 2005 was $5.3 million and $8.2 million, respectively.

Interest expense for the second quarter of fiscal 2007 was $1.2 million compared with $0.3 million for the same period in fiscal 2006. Interest expense for the six month periods ended December 31, 2006 and 2005 was $1.4 million and $0.3 million respectively. The increase in interest expense for fiscal 2007 is attributable to the amounts borrowed to finance the Vodavi acquisition.

Deferred taxes associated with the amortization for tax purposes of the goodwill related to the acquisitions of the operations of Vertical Networks and Comdial for the second quarters of fiscal 2007 and 2006 were $0.2 million and $0.2 million, respectively. For the six month periods ended December 31, 2006 and 2005, the deferred taxes recorded were $0.3 million and $0.2 million, respectively.

Vertical reported a net loss to common shareholders for the second quarter of fiscal 2007 of $3.9 million, or 8 cents per share, compared to a net loss of $5.4 million, or 12 cents per share, during the same quarter of fiscal 2006. For the six months ended December 31, 2006, Vertical reported a net loss to common shareholders of $7.4 million, or 16 cents per share compared with a net loss of $8.7 million or 22 cents per share for the same period in 2005.

Vertical’s cash and cash equivalents (including restricted cash), long-term debt and shareholders’ equity balances at December 31, 2006 were $17.1 million, $15.2 million and $44.9 million, respectively.

The previously announced December 1, 2006 acquisition of Phoenix, Arizona-based Vodavi Technology, Inc. positions Vertical as a top-five telephony vendor serving the small to medium-sized business (SMB) market in North America, based on line shipments, based on data reported by Gartner Group. As a result of the Vodavi acquisition, Vertical will benefit from a strategic business relationship with LG-Nortel Co., Ltd. ("LGN"), formerly Vodavi's largest shareholder and currently its primary product development and manufacturing business partner.

“We are pleased with our preliminary integration efforts with the Vodavi acquisition and we continue to be excited about the benefits of this transaction," said Bill Tauscher, Chairman and Chief Executive Officer. “We expect to have this integration fully complete by the middle of this year and have confirmed that the cost savings benefits will have a significant impact on our results as we go forward and complete this task. Our growth and expansion in 2007 will be due in large part to our ability to demonstrate the value of our innovative products and services. We look forward early this year to providing a compelling new solution to our business partners and end user customers that integrates our current product portfolio with a clear migration path for all our customers.”

About Vertical Communications, Inc.
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 and include CVS/pharmacy, Staples 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.

Financial Community Contact:
Ken Clinebell
Vertical Communications, Inc.
kclinebell@vertical.com
941-554-5000 ext. 1513

Press Contact:
Stephanie Fox Muller
Vertical Communications, Inc.
sfoxmuller@vertical.com
617-354-0600 x160

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995.
This document contains forward-looking statements based on current expectations or beliefs, as well as a number of assumptions about future events, and these statements are subject to important facts and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The forward-looking statements in this document address a variety of subjects, including, without limitation, statements about the benefits the Company expects to achieve upon the acquisition of Vodavi, including, without limitation, the benefits that the acquisition will have on the Company’s dealers and customers; the Company’s assumptions about the future performance of Vodavi; the Company’s ability to achieve certain synergies and economies of scale upon the completion of the acquisition; the Company’s ability to become a significant player within the IP-PBX telephony market; the Company’s ability to meet the future obligations that it will incur after the closing of the acquisition, and others.  The following factors, among others, could cause actual results to differ materially from those described in these forward-looking statements: the risk that the Company may fail to achieve the anticipated benefits from the Vodavi acquisition, including, without limitation, failing to obtain the desired benefits for the Company’s dealers and customers; the risk that the Company’s assumptions about the future performance of Vodavi may prove to be incorrect; the risk that the Company may be unable to achieve the desired synergies and economies of scale upon the completion of the acquisition; the risk that the Company may be unable to become a significant player within the IP-PBX telephony market; the risk that the Company may be unable to meet its future obligations upon the closing of the acquisition; and other risks and assumptions detailed in the Company's filings with the Securities and Exchange Commission.

Trademark Information
Vertical Communications and the Vertical Communications logo and combinations thereof are trademarks of Vertical Communications, Inc. Artisoft, Comdial, TeleVantage, InstantOffice, Vertical Networks, Vodavi, XTS IP, Telenium IP and StarPlus are registered trademarks of Vertical Communications, Inc. All other brand and product names are used for identification only and are the property of their respective holders.