**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**Washington,        D.C. 20549**

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**FORM        10-KSB**

**For        the fiscal year ended December 31, 2006.**

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**VERTICAL      COMPUTER SYSTEMS, INC.**

| **Delaware**                            | **65-0393635**                                                    |
|-----------------------------------------|-------------------------------------------------------------------|
| (State                of Incorporation) | (I.R.S.                Employer Identification                No) |

**201      Main Street, Suite 1175**

**Fort      Worth, Texas 76102**

**(817)      348-8717**

| Title                of each class | Name                of each exchange on which registered |
|------------------------------------|----------------------------------------------------------|
| **None**                           | **None**                                                 |

**Common      Stock, par value $0.00001 per share**

**None**

**No**

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**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**FORM      10-KSB**

**FOR      THE FISCAL YEAR ENDED DECEMBER 31, 2006**

**TABLE      OF CONTENTS**

| PART                  I                                                                                                                                                             |   |   | **2**  |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| **ITEM                    1. DESCRIPTIONOF BUSINESS**                                                                                                                               |   |   | **2**  |   |
| **ITEM                    2. DESCRIPTIONOFPROPERTY**                                                                                                                                |   |   | **9**  |   |
| **ITEM                    3. LEGAL PROCEEDINGS**                                                                                                                                    |   |   | **9**  |   |
| **ITEM                    4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY                    HOLDERS**                                                                           |   |   | **11** |   |
| PART                  II                                                                                                                                                            |   |   | **12** |   |
| **ITEM                    5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER                    MATTERS**                                                                          |   |   | **12** |   |
| **ITEM                  6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS                  OF OPERATIONS**                                           |   |   | **18** |   |
| **ITEM                  7. CONSOLIDATED FINANCIAL STATEMENTS**                                                                                                                      |   |   | **25** |   |
| **ITEM                  8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND                  FINANCIAL DISCLOSURE**                                                   |   |   | **25** |   |
| **ITEM                  8A. CONTROLS AND PROCEDURES**                                                                                                                               |   |   | **25** |   |
| **ITEM                  8B. OTHER INFORMATION**                                                                                                                                     |   |   | **25** |   |
| PART                  III                                                                                                                                                           |   |   | **26** |   |
| **ITEM                  9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE                  ACT** |   |   | **26** |   |
| **ITEM                  10. EXECUTIVE COMPENSATION**                                                                                                                                |   |   | **28** |   |
| **ITEM                  11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND                  MANAGEMENT**                                                                       |   |   | **31** |   |
| **ITEM                  12. CERTAIN RELATIONSHIPS AND RELATED                  TRANSACTIONS**                                                                                       |   |   | **32** |   |
| **ITEM                  13. EXHIBITS AND REPORTS ON FORM 8-K**                                                                                                                      |   |   | **35** |   |
| **ITEM                  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                                                                |   |   | **41** |   |
| SIGNATURES                                                                                                                                                                          |   |   | **42** |   |
|                                                                                                                                                                                     |   |   |   |   |
| CONSOLIDATED                  FINANCIAL STATEMENTS                                                                                                                                  |   |   |   |   |
|                                                                                                                                                                                |   |   |   |   |
| Exhibit                  31.1 Section                  302 Certification by Chief Executive Officer                                                                            |   |   |   |   |
| Exhibit                  31.2 Section                  302 Certification by Principal Accounting Officer                                                                       |   |   |   |   |
| Exhibit                  32.1  Section                  906 Certification by Chief Executive Officer                                                                           |   |   |   |   |
| Exhibit                  32.2  Section                  906 Certification by Principal Accounting Officer                                                                      |   |   |   |   |

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**PART      I**

**ITEM        1. DESCRIPTION OF BUSINESS**

***Forward-Looking      Statements and Associated Risks.***
*This      Report contains forward-looking statements. Such forward-looking statements      include statements regarding, among other things, (a) our projected sales and      profitability, (b) our growth strategies, (c) anticipated trends in our      industry, (d) our future financing plans, (e) our anticipated needs for working      capital, (f) our lack of operational experience, and (g) the benefits related      to      ownership of our common stock. Forward-looking statements, which involve      assumptions and describe our future plans, strategies, and expectations, are      generally identifiable by use of the words *
*“*
*may,*
*”*
* *
*“*
*will,*
*”*
* *
*“*
*should,*
*”*
* *
*“*
*expect,*
*”*
* *
*“*
*anticipate,*
*”*
* &      lt;/e m>*
*“*
*estimate,*
*”*
* *
*“*
*believe,*
*”*
* *
*“*
*intend,*
*”*
*      or*
*“*
*project*
*”*
*      or      the negative of these words or other variations on these words or comparable      terminology. This information may involve known and unknown risks,      uncertainties, and other factors that may cause our actual results, performance,      or achievements to be materially different from the future results, performance,      or achievements expressed or implied by any forward-looking statements. These      statements may be found under *
*“*
*Management*
*’*
*s      Discussion and Analysis of Financial Condition and Results of      Operations*
*”*
*      and*
*“*
*Business,*
*”*
*      as      well as in this Report generally. Actual events or results may differ materially      from those discussed in forward-looking statements as a result of various      factors, including, without limitation, the risks outlined under*
*“*
*Risk      Factors*
*”*
*      and      matters described in this Report generally. In light of these risks and      uncertainties, there can be no assurance that the forward-looking statements      contained in this report will in fact occur as projected.*

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**Business      Overview**

| **MARKET**                                           |   | **PRODUCT**          |   | **OWNERSHIP/****LICENSOR**       |   | **LICENSEE**                               |
|------------------------------------------------------|--------|----------------------|--------|----------------------------------|--------|--------------------------------------------|
| Human                Resources and Payroll           |   | emPath®         |   | Now                Solutions     |   | Now                Solutions               |
| Large                Corporations and Universities   |   | SiteFlashTM     |   | Vertical                Computer |   | Vertical                Computer Systems   |
| Government                Sector- Emergency Response |   | ResponseFlashTM |   | Vertical                Computer |   | GIS                                        |
| Publishing                Content                    |   | NewsFlashTM     |   | Vertical                Computer |   | EnFacet                                    |
| Emily®                XML Scripting Language    |   | Emily®          |   | Vertical                Computer |   | Vertical                Internet Solutions |
| Security                                             |   | IA                   |   | CW                International  |   | Vertical                Computer Systems   |
| IT                Management and Compliance          |   | StatePointPlus® |   | CW                International  |   | Vertical                Computer Systems   |
| Encryption                                           |   | CKM®            |   | TecSec,                Inc.      |   | Vertical                Computer Systems   |

***Administrative      Software***

***Internet      Core Technologies***

*objects*
*Content*
*Form*
*Function      *

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***Software      Services***

**Business      Operations and Divisions**

*Now      Solutions, Inc.*

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***Government      Internet Systems, Inc.***

***Vertical      Internet Solutions, Inc***

** **

***EnFacet,      Inc.***

***Globalfare.com***

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***Pointmail.com,      Inc.***

**Taladin,      Inc.**

**Minority      Interests and Royalty Interests**

***MedData      Solutions, Inc.***

***iNet      Purchasing, Inc.***
* *

***TranStar      Systems, Inc.***
** **

** **

**Strategic      Alliances and Software Distributors**

***CW      International, LLC***
**.      **

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***Sisfinance***

***TecSec,      Incorporated***

***Infotec,      Inc.***
** **
** **

**Competition      **

**Strategic      Overview **

** **

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**Proprietary      Rights **

**Regulatory      Environment; Public Policy**

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**Employees**

**ITEM        2. DESCRIPTION OF PROPERTY**

**ITEM        3. LEGAL PROCEEDINGS **

** **

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**ITEM        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY        HOLDERS**

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**PART      II**

**ITEM        5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**
** **

|                                            |   | **High** |   | **Low** |   |
|-------------------------------------------------|--------|----------|--------|---------|--------|
| Quarter                Ended December 31, 2006  |   | $        | 0.0210 |    | $      | 0.0120 |   |
| Quarter                Ended September 30, 2006 |   | $        | 0.0750 |    | $      | 0.0180 |   |
| Quarter                Ended June 30, 2006      |   | $        | 0.0520 |    | $      | 0.0165 |   |
| Quarter                Ended March 31, 2006     |   | $        | 0.0170 |    | $      | 0.0060 |   |
|                                            |   |     |   |    |   |   |   |
|                                            |   |     |   |    |   |   |   |
| Quarter                Ended December 31, 2005  |   | $        | 0.0089 |    | $      | 0.0030 |   |
| Quarter                Ended September 30, 2005 |   | $        | 0.0110 |    | $      | 0.0030 |   |
| Quarter                Ended June 30, 2005      |   | $        | 0.0160 |    | $      | 0.0020 |   |
| Quarter                Ended March 31, 2005     |   | $        | 0.0150 |    | $      | 0.0001 |   |

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**Number      of Holders**

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**Dividends**

**Unregistered      Sales of Securities**

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** **

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** **

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**ITEM        6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF        OPERATIONS**

**Management’s      Discussion and Analysis of Financial Condition and Results of      Operation**
**s**

**Critical      Accounting Policies**

**Use      of Estimates**

**Capitalized      Software Costs**

**Impairment      of Long-Lived Assets**

**Revenue      Recognition**

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**Stock-Based      Compensation**

**Investments**

**Results      of Operations**

**Year      Ended December 31, 2006 Compared To Year Ended December 31, 2005**

***Total      Revenues.***

***Selling,      General and Administrative Expenses.***

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***Operating      Loss.***

***Interest      Expense***
**.**

***Net      Loss.***

***Dividend      Applicable to Preferred Stock.***

***Net      Loss Applicable to Common Stockholders.***

***Net      Loss Per Share.***

**Financial      Condition, Liquidity, Capital Resources And Recent      Developments**

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**Contractual      Obligations and Commercial Commitments**

|                                   |   | Balance                at |      | Due                in Next Five Years |   |
|----------------------------------------|--------|---------------------------|-----------|---------------------------------------|--------|
| Contractual                Obligations |   | 12/31/06                  |      | 2007                                  |   | 2008 |   | 2009 |   | 2010 |   | 2011+ |   |
| Notes                payable           |   |                      | 5,727,931 |                                  |   | 2,544,682 |   |   | 883,029 |   |   | 623,027 |   |   | 298,754 |   |   | 1,378,439 |   |
| Convertible                debts       |   |                      | 40,000    |                                  |   | 40,000 |   |   |   |   |   | - |   |   | - |   |   | - |   |
| Operating                lease         |   |                      | 155,465   |                                  |   | 61,742 |   |   | 53,556 |   |   | 40,167 |   |   | - |   |   | - |   |
| Total                                  |   |                      | 5,923,396 |                                  |   | 2,646,424 |   |   | 936,585 |   |   | 663,194 |   |   | 298,754 |   |   | 1,378,439 |   |

| Notes                Payable       |   | 2006   |      | 2005   |   |
|------------------------------------|--------|--------|-----------|--------|--------|
| In                default          |   | $      | 2,263,638 |   | $      | 3,540,093 |   |
| Current                            |   |   | 3,464,293 |   |   | 1,791,212 |   |
| Total                Notes Payable |   | $      | 5,727,931 |   | $      | 5,331,305 |   |

**New      Accounting Pronouncements**

**Going      Concern Uncertainty**

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**Off-Balance      Sheet Arrangements.**

**Risk      Factors Related to the Company’s **
**Business,      Operating Results and Financial Condition**

**We      Have Historically Incurred Losses and May Continue to Do So in the      Future**

**We      Have Been Subject to a Going Concern Opinion from Our Independent Auditors,      Which Means That We May Not Be Able to Continue Operations Unless We Obtain      Additional Funding**

**The      Company’s Ability to Continue as a Going Concern Is Dependent on Its Ability to      Raise Additional Funds and to Establish Profitable Operations.**

**Our      Success Depends On Our Ability to Generate Sufficient Revenues to Pay For The      Expenses of Our Operations**

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**Our      Success Depends On Our Ability to Obtain Additional      Capital**

**We      Have a Working Capital Deficit, Which Means That Our Current Assets**
**on      December 31, 2006 Were Not Sufficient to Satisfy Our Current Liabilities on      That      Date**

**Our      Operating Results May Fluctuate Because of a Number of Factors, Many of Which      Are Outside of Our Control**

| ·   | the                demand for our SiteFlashTM and Emily®technology; |
|--------------------|-------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | the                demands for Now Solutions’ emPath®product; |
|--------------------|--------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | the                level of usage of the Internet; |
|--------------------|----------------------------------------------------|
|   |   |
|--------|--------|

| ·   | the                level of user traffic on our Websites; |
|--------------------|-----------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | seasonal                trends and budgeting cycles in                sponsorship; |
|--------------------|------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | incurrence                of costs relating to the development, operation and expansion of                our                Internet operations; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | introduction                of new products and services by us and our                competitors; |
|--------------------|----------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | costs                incurred with respect to acquisitions; |
|--------------------|-------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | price                competition or pricing changes in the                industry; |
|--------------------|-------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | technical                difficulties or system failures; and |
|--------------------|---------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | general                economic conditions and economic conditions specific to the Internet                and                Internet media. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

**We      May Have Difficulty Managing Our Growth and Integrating Recently Acquired      Companies**

| ·   | the                difficulty of assimilating the operations and personnel of the acquired                companies; |
|--------------------|----------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | the                potential disruption of our ongoing business and distraction of                management; |
|--------------------|---------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | the                difficulty of incorporating acquired technology or content and rights                into                our products and media properties; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | the                correct assessment of the relative percentages of in-process research                and                development expense which needs to be immediately written off as                compared                to the amount which must be amortized over the appropriate life of                the                asset; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | the                failure to successfully develop an acquired in-process technology                resulting in the impairment of amounts currently capitalized as intangible                assets; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | unanticipated                expenses related to technology                integration; |
|--------------------|-----------------------------------------------------------------------------------------|

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| ·   | the                maintenance of uniform standards, controls, procedures and                policies; |
|--------------------|--------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | the                impairment of relationships with employees and customers as a result                of                any integration of new management personnel;                and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | the                potential unknown liabilities associated with acquired                businesses. |
|--------------------|------------------------------------------------------------------------------------------------------|

**Our      Success Depends On Our Ability to Protect Our Proprietary      Technology**

**Our      Stock Price Has Historically Been Volatile, Which May Make It More Difficult      for      Shareholders to Resell Shares When They Choose To At Prices They Find      Attractive**

**Our      Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult for      Investors to Sell Their Shares Due To Suitability      Requirements**

| ·   | With                a price of less than $5.00 per share; |
|--------------------|-----------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | That                are not traded on a recognized national                exchange; |
|--------------------|--------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | Whose                prices are not quoted on the NASDAQ automated quotation system (NASDAQ                listed stock must still have a price of not less than $5.00 per share);                or |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|

| ·   | In                issuers with net tangible assets less than $2 million (if the issuer                has                been in continuous operation for at least three years) or $5 million                (if in continuous operation for less than three years), or with average                revenues of less than $6 million for the last three                years. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**The      Company**
**      Will Likely Experience Losses **
**for      the Foreseeable Future**

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**ITEM          7. CONSOLIDATED FINANCIAL STATEMENTS**

**ITEM        8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL        DISCLOSURE**

**ITEM        8A. CONTROLS AND PROCEDURES**

**Evaluation      of Disclosure Controls and Procedures**

**Changes      in Internal Controls Over Financial Reporting**

**ITEM        8B. OTHER INFORMATION**

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**PART      III**

**ITEM        9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE        WITH        SECTION 16(**
**A**
**)        OF THE EXCHANGE ACT**

** **

| **Name**                        |   | **Age** |   | **Position**                                                   |   | **Tenure**             |
|---------------------------------|--------|---------|--------|----------------------------------------------------------------|--------|------------------------|
| Richard                S. Wade  |   | 63      |   | President,                Chief Executive Officer and Director |   | 7                years |
| William                K. Mills |   | 48      |   | Secretary                and Director                          |   | 7                years |

**Richard      S. Wade, President, Chief Executive Officer and Director, Chairman and Director      of Now Solutions**

**William      K. Mills, Secretary and Director**

**Election      of Directors; Family Relationships; Legal Proceedings**

**Compliance      with Section 16(a) Of The Exchange Act**

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**Code      of Ethics**

**Significant      Employees of the Company**

**Luiz      Valdetaro, Chief Technology Officer, Director of Now      Solutions**

**David      Braun, Chief Financial Officer of VCSY and Now Solutions**

**Significant      Employees of Now Solutions, Inc.**

**Marianne      M. Franklin, President and Chief Executive Officer **

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**Pete      Ashey, ExecutiveVice President of Business Development**

**Dorothy      Spotts, Vice President of Services and Support**

**Carmelina      Uggenti, Vice President of Customer Development**

**Laurent      Tetard, Vice President of Operations**

**Robert      Sterpin, Vice President of Sales, Canada & US Midwest**

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**ITEM        10. EXECUTIVE COMPENSATION**

**SUMMARY      COMPENSATION TABLE**

|                                             |   | **Annual                  Compensation** |   | **Long-Term                  Compensation** |   |      |   |
|--------------------------------------------------|--------|------------------------------------------|--------|---------------------------------------------|--------|-----------|--------|
|                                             |   |                                     |   |                                        |   |      |   |   |   | **Awards** |   | **Payouts** |   |   |   |
| **Name                  and Principal Position** |   | **Year**                                 |   | **Salary**                                  |   | **Bonus** |   | **Other                  Annual Compensation** |   | **Restricted                  Stock Award(s)** |   | **Options/                  SARs** |   | **LTIP                  Payouts** |   | **All                  OtherCompensation** |   |
|                                             |   |                                     |   | **($)**                                     |   | **($)**   |   | **($)** |   | **($)** |   | **(#)** |   | **($)** |   | **($)** |   |
|                                             |   |                                     |   |                                        |   |      |   |   |   |   |   |   |   |   |   |   |   |
| Richard                  Wade,(1)                |   |                                     | 2006   |                                        | $      | 300,000   | (1)    |   | - |   |   | - |   |   | - |   |   | 20,600,000 | (1) |   | - |   |   | - |   |
| President                  and Chief             |   |                                     | 2005   |                                        | $      | 300,000   |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Executive                  Officer               |   |                                     |   |                                        |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |                                     |   |                                        |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Luiz                  Valdetaro, (2)             |   |                                     | 2006   |                                        | $      | 150,000   |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Chief                  Technology                |   |                                     | 2005   |                                        | $      | 150,000   |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Officer                                          |   |                                     |   |                                        |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |                                     |   |                                        |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| James                  Salz (3)                  |   |                                     | 2006   |                                        | $      | 100,000   |   |   | - |   |   | - |   |   | 9,000 |   |   | - |   |   | - |   |   | - |   |
| Corporate                  Counsel               |   |                                     | 2005   |                                        | $      | 100,000   |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |

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| (1) | Mr.                Wade deferred $150,000, $154,097, $47,218, $155,270 and $300,000                of his                salary in 2006, 2005, 2004, 2003 and 2002, respectively. Pursuant                to his                employment agreement, dated December 1, 2001, Mr. Wade, as President                and                CEO, was entitled to purchase up to 20,600,000 shares of common stock                for                three years at a strike price of $0.10, vesting in equal monthly                amounts                over a 36-month period. Of the warrants to purchase 20,600,000 shares                of                common stock of the Company, 16,022,223** **expired                as of April                16, 2007. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Mr.                Valdetaro deferred $50,269, $86,766 and $150,000 of his salary in                2005,                2004 and 2003, respectively. During 2005, Mr. Valdetaro exercised                3-year                warrants and purchased 1,000,000 shares of the common stock of the                Company                at an exercise price of $0.005 per share in connection with a loan                he made                to the Company. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Mr.                Salz deferred $48,345 and $55,000 and $58,333 of his salary in 2004,                2003,                and 2002 respectively. In January 2006, Mr. Salz was issued 1,500,000                unregistered shares of common stock of the Company (at a fair market                value                of $9,000) pursuant to a restricted stock agreement with the Company                which                provides for the stock to vest over one year in three equal installments                at four month intervals, of which 1,000,000 shares had vested at                December                31, 2006. The remaining 500,000 shares vested in January 2007. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **OUTSTANDING                  EQUITY AWARDS AT FISCAL YEAR-END (2006)** |   |
|--------------------------------------------------------------------------|--------|
| **Option                  Awards**                                       |   | **Stock                  Awards** |   |
|                                                                     |   |   |   |
| **Name **                                                           |   | **Number                   of  Securities  Underlying  Unexercised  Options                   (#)  Exercisable** |   | **Number                   of  Securities  Underlying  Unexercised  Options                   (#)  Unexercisable** |   | **Equity                   Incentive  Plan  Awards:  Number  of  Securities                  Underlying  Unexercised  Unearned  Options                   (#)** |   | **Option                   Exercise  Price  ($)** |   | **Option                   Expiration  Date** |   | **Number                   of Shares  or Units  of Stock  That Have  Not                   Vested  (#)** |   | **Market                   Value of  Shares or  Units of  Stock  That Have                   Not  Vested  ($)** |   | **Equity                   Incentive  Plan Awards:  Number  of  Unearned                   Shares,  Units or  Other Rights  That Have  Not                   Vested  (#)** |   | **Equity                  Incentive  Plan Awards:  Market or Payout  Value  of                   Unearned  Shares,  Units or  Other  Rights                   That Have  Not  Vested  ($)** |   |
|                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Richard                  WadePresident/CEO                  (1)          |   |   | 6,294,444 |   |   | - |   |   | - |   | $ | 0.10 |   |   | 11/30/07 |   |   | - |   |   | - |   |   | - |   |   | - |   |
|                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Jim                  SalzCorporate                  Counsel (2)          |   |   | - |   |   | - |   |   | - |   |   | - |   |   |   |   |   | 500,000 |   |   | 3,000 |   |   | 500,000 |   |   | - |   |

| (1) | Pursuant                to his employment agreement, dated December 1, 2001, Mr. Wade, as                President and CEO, was entitled to purchase up to 20,600,000 shares                of                common stock for three years at a strike price of $0.10 vesting in                equal                amounts each over a 36 months period. Of the warrants to purchase                20,600,000 shares of common stock of the Company, 16,022,223 have                expired                as of April                16, 2007. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| (2) | In                January 2006, Mr. Salz was issued 1,500,000 unregistered shares of                common                stock of the Company (at a fair market value of $9,000) pursuant                to a                restricted stock agreement with the Company, which provides for the                stock                to vest over one year in three equal installments at four month intervals,                of which 1,000,000 shares had vested at December 31, 2006. The remaining                500,000 shares vested in January                2007. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Stock      Option Plan.**

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**Director      Compensation**

|                           |   | **DIRECTOR                  COMPENSATION**       |   |                              |   |
|--------------------------------|--------|--------------------------------------------------|--------|-----------------------------------|--------|
| **Name**                       |   | **Fees                  Earned or Paid in Cash** |   | **Stock                  Awards** |   | **Option                  Awards** |   | **Non-Equity                  Incentive Plan Compensation** |   | **Nonqualified                  Deferred Compensation Earnings** |   | **All                  Other Compensation** |   | **Total** |   |
|                           |   | **($)**                                          |   | **($)**                           |   | **($)** |   | **($)** |   | **($)** |   | **(#)** |   | **($)** |   |
|                           |   |                                             |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| William                  Mills |   |                                             | 10,500 |                              |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 10,500 |   |

**Employment      Agreements**

** **
** **

**ITEM        11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND        MANAGEMENT**

**Security      Ownership By Named Executive Officers, Directors And Beneficial Owners**

| **Title                  of****Class** |   | **Name                  and Address of Beneficial Owner****(1)** |                                                             | **Shares                  of Common Stock Beneficially Owned** |   | **Percent                  of Class** |   |
|----------------------------------------|--------|------------------------------------------------------------------|------------------------------------------------------------------|----------------------------------------------------------------|--------|---------------------------------------|--------|
| Common                                 |   |                                                             | Richard                  Wade                                    |                                                           |   | 114,167,983                           | (2)    |   | 11.42 | % |
| Common                                 |   |                                                             | William                  K. Mills                                |                                                           |   | 3,000,000                             |   |   | * |   |
| Common                                 |   |                                                             | All                  Directors and Executive Officers as a group |                                                           |   |                                  |   |   |   |   |
|                                        |   |                                                             | (2                  persons)                                |                                                           |   | 117,167,983                           |   |   | 11.72 | % |

----

| * | Less                than 1%. |
|---|------------------------------|

----

| (1) | Unless                otherwise indicated, the address of each director and officer is                c/o                Vertical Computer Systems, Inc., 201 Main Street, Suite 1175, Fort                Worth,                TX 76102. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Includes                warrants to purchase up to 20,600,000 shares of common stock of the                Company for services as CEO and President, less 16,022,223 which                have                expired as of April                16, 2007.                Also includes 101,370,050 shares owned by Mountain Reservoir Corporation                (“MRC”),                a corporation controlled by the W5 Family Trust, of which Richard                W. Wade                is a trustee; and includes 1,000,000 shares owned by Jennifer Wade,                a                child of Mr. Wade. MRC pledged 10,000,000 shares common stock of                the                Company shares as collateral on a $25,000 note issued in August 2002.                MRC                pledged 4,000,000 and 3,000,000 shares common stock of the Company                shares                as collateral on a $60,000 note and a $40,000 note, respectively,                that                were issued by the Company in November 2003. MRC pledged 5,000,000                shares                of common stock of the Company as collateral on a $200,000 note issued                in                October 2006 to Mr. Weber. Also in October 2006, MRC pledged 5,000,000                shares of common stock of the Company as collateral on a $215,000                Note                issued by Now Solutions to the Company and assigned to Mr. Weber                in                October 2005. MRC pledged 10,000,000 shares of common stock of the                Company                as collateral on a $300,000 note issued in March 2007 to Mr. Weber                and as                collateral on the interest payments due under the $200,000 note issued                in                October 2006.   |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**ITEM        12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

----

----

**s**

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**Item      13. **EXHIBITS      AND REPORTS ON FORM 8-K ****

| **(a)  ** | **Exhibits:** |
|---------------------|---------------|

| **Exhibit                  No.** |   | **Description**                                                                                                                                                        |   | **Location**                                                                                                                            |
|----------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                              |   | Certificate                  of Ownership and Merger Merging Scientific Fuel Technology, Inc.                  into                  Vertical Computer Systems, Inc.   |   | Incorporated                  by reference to Exhibit 2.1 to the Company’s Form 10-KSB filed on April                  14, 2006   |
|                             |   |                                                                                                                                                                   |   |                                                                                                                                    |
| 3.1                              |   | Original                  Unamended Certificate of Incorporation of Vertical Computer Systems,                  Inc.                  (f/k/a Xenogen Technology, Inc.) |   | Incorporated                  by reference to Exhibit 3.1 to the Company’s Form 10-KSB filed on April                  14, 2006   |
|                             |   |                                                                                                                                                                   |   |                                                                                                                                    |
| 3.2                              |   | Certificate                  of Amendment of Certificate of Incorporation (change name to Vertical                  Computer Systems, Inc.)                            |   | Incorporated                  by reference to Exhibit 3.2 to the Company’s Form 10-KSB filed on April                  14, 2006   |
|                             |   |                                                                                                                                                                   |   |                                                                                                                                    |
| 3.3                              |   | Certificate                  of Amendment of Certificate of Incorporation (2000)                                                                                       |   | Incorporated                  by reference to Exhibit 3.3 to the Company’s Form 10-KSB filed on April                  14, 2006   |
|                             |   |                                                                                                                                                                   |   |                                                                                                                                    |
| 3.4                              |   | Amended                  and Restated By-Laws of the Company                                                                                                           |   | Incorporated                  by reference to Exhibit 3.4 to the Company’s Form 10-KSB filed on April                  14, 2006   |
|                             |   |                                                                                                                                                                   |   |                                                                                                                                    |
| 4.1                              |   | Certificate                  of Designation of 4% Cumulative Redeemable Series A Preferred                  Stock                                                      |   | Incorporated                  by reference to Exhibit 4.1 to the Company’s Form 10-KSB filed on April                  14, 2006   |
|                             |   |                                                                                                                                                                   |   |                                                                                                                                    |
| 4.2                              |   | Certificate                  of Designation of 10% Cumulative Redeemable Series B Preferred                  Stock                                                     |   | Incorporated                  by reference to Exhibit 4.2 to the Company’s Form 10-KSB filed on April                  14, 2006   |
|                             |   |                                                                                                                                                                   |   |                                                                                                                                    |
| 4.3                              |   | Certificate                  of Designation of 4% Cumulative Redeemable Series C Preferred                  Stock                                                      |   | Incorporated                  by reference to Exhibit 4.3 to the Company’s Form 10-KSB filed on April                  14, 2006   |
|                             |   |                                                                                                                                                                   |   |                                                                                                                                    |
| 4.4                              |   | Certificate                  of Designation of 15% Cumulative Redeemable Series D Preferred                  Stock                                                     |   | Incorporated                  by reference to Exhibit 4.4 to the Company’s Form 10-KSB filed on April                  14, 2006   |
|                             |   |                                                                                                                                                                   |   |                                                                                                                                    |
| 4.5                              |   | Form                  of Warrant                                                                                                                                       |   | Incorporated                  by reference to Exhibit 10.96 to the Company’s Form 10-KSB filed on August                  7, 2003 |

----

| **Exhibit                  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Location**                                                                                                                               |
|----------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6                              |   | Form                  of Cashless Exercise Warrant                                                                                                                                                                                                                                                                                                                                                                                             |   | Incorporated                  by reference to Exhibit 4.55 to the Company’s Form 10KSB filed on March                  31, 2005      |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 4.7                              |   | Form                  of Restricted Stock Agreement                                                                                                                                                                                                                                                                                                                                                                                            |   | Incorporated                  by reference to Exhibit 4.7 to the Company’s Form 10-KSB filed on April                  14, 2006      |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.1                             |   | 1999                  Stock Option Plan of the Company                                                                                                                                                                                                                                                                                                                                                                                         |   | Incorporated                  by reference to Exhibit 10.01 to the Company’s Form 10-KSB filed on April                  14, 2006    |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.2                             |   | Berche                  Promissory Note dated August 30, 2002                                                                                                                                                                                                                                                                                                                                                                                  |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.3                             |   | Form                  of Debenture                                                                                                                                                                                                                                                                                                                                                                                                             |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.4                             |   | Promissory                  Note as of October 31, 2001 between the Company and a third                  party                                                                                                                                                                                                                                                                                                                                 |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.5                             |   | Asset                  Pledge Agreement as of October 31, 2001 between the Company and                  a third                  party                                                                                                                                                                                                                                                                                                         |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.6                             |   | Employment                  Agreement as of December 1, 2001 between the Company and Richard                  Wade                                                                                                                                                                                                                                                                                                                             |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.7                             |   | Warrant                  Agreement as of December 19, 2001 between the Company and Richard                  Wade                                                                                                                                                                                                                                                                                                                               |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.8                             |   | Warrant                  Agreement as of December 19, 2001 between the Company and Richard                  Wade                                                                                                                                                                                                                                                                                                                               |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.9                             |   | Promissory                  Note, dated June 3, 2002, between the Company and a third party                  lender                                                                                                                                                                                                                                                                                                                            |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.10                            |   | Promissory                  Note, dated June 24, 2002, between the Company and a third party                  lender                                                                                                                                                                                                                                                                                                                           |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.11                            |   | (a)                  Promissory Note, dated August 7, 2002, between the Company and                  a third                  party lender  (b)                  Pledge Agreement, dated August 7, 2002, between the Company and                  a third                  party lender                                                                                                                                                   |   | Provided                  herewith                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                       |
| 10.12                            |   | (a)                  Term Sheet, dated October 17, 2002, between the Company and a third                  party                  lender (b)                  Promissory Note, dated October 17, 2002, between the Company and                  a third                  party lender (c)                  Stock Pledge Agreement, dated October 17, 2002, between the MRC                  and a                  third party lender |   | Incorporated                  by reference to Exhibit 10.93 to the Company’s Form 10-QSB filed on                  December 11, 2002 |

----

| **Exhibit                  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                        |   | **Location**                                                                                                                             |
|----------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13                            |   | (a)                  Form of Director Agreement of Company’s subsidiary, Government Internet                  Systems, Inc. (GIS) Director Agreement, between GIS and                  director (b)                  Form of Warrants in connection with GIS Director Agreement between                  the                  Company’s Subsidiary, GIS, and GIS director                             |   | Incorporated                  by reference to Exhibit 10.98 to the Company’s Form 10-KSB filed on August                  7, 2003  |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                     |
| 10.14                            |   | (a)                  Executive Agreement, dated December 19, 2002, between the Company’s                  Subsidiary, GIS, and Victor Weber (b)                  Warrants dated December 19, 2002 issued to Victor Weber                                                                                                                                                                                    |   | Incorporated                  by reference to Exhibit 10.99 to the Company’s Form 10-KSB filed on August                  7, 2003  |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                     |
| 10.15                            |   | Executive                  Agreement, dated December 26, 2002, between the Company’s Subsidiary, GIS,                  and Stephen Rossetti                                                                                                                                                                                                                                                                      |   | Incorporated                  by reference to Exhibit 10.100 to the Company’s Form 10-KSB filed on                  August 7, 2003 |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                     |
| 10.16                            |   | (a)                  Executive Agreement, dated January 8, 2003, between the Company’s                  Subsidiary, GIS, and David Kinney (b)                  Warrants, dated January 8, 2003 issued to David Kinney in connection                  with                  Executive Agreement between the Company’s Subsidiary, GIS, and David                  Kinney                               |   | Incorporated                  by reference to Exhibit 10.101 to the Company’s Form 10-KSB filed on                  August 7, 2003 |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                     |
| 10.17                            |   | Amendment                  to Stock Purchase Agreement, dated February 1, 2003, between the                  Company                  and Enfacet.                                                                                                                                                                                                                                                                     |   | Incorporated                  by reference to Exhibit 10.102 to the Company’s Form 10-KSB filed on                  August 7, 2003 |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                     |
| 10.18                            |   | $200,000                  Purchase of Convertible Debentures, dated April 14, 2003, between                  the                  Company and third party buyers.  (a)                  Securities Purchase Agreement (for $200,000 of Convertible                  Debentures) (b)                  Form of Debenture  (c)                  Registration Rights Agreement                              |   | Incorporated                  by reference to Exhibit 10.103 to the Company’s Form 10-KSB filed on                  August 7, 2003 |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                     |
| 10.19                            |   | Equity                  Line of Credit Agreement, dated April 14, 2003, between the Company                  and                  Cornell Capital Partners, L.P (a)                  Equity Line of Credit Agreement,  (b)                  Registration Rights Agreement (c)                  Compensation Debenture                                                                                   |   | Incorporated                  by reference to Exhibit 10.104 to the Company’s Form 10-KSB filed on                  August 7, 2003 |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                     |
| 10.20                            |   | (a)                  Services agreement, dated April 10, 2003, between the Company and                  Vasu                  Vijay  (b)                  Promissory note, dated April 10, 2003, issued by the Company to                  Vasu                  Vijay (c)                  Consulting Agreement, dated April 14 2003, between the Company                  and Vasu                  Vijay. |   | Incorporated                  by reference to Exhibit 10.105 to the Company’s Form 10-KSB filed on                  August 7, 2003 |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                     |
| 10.21                            |   | Stock                  Sale Agreement, dated April 11, 2003, between the Company and Mike                  Radlovic  (a)                  Stock Sale Agreement,  (b)                  Stock Pledge Agreement (c)                  Promissory Note                                                                                                                                                       |   | Incorporated                  by reference to Exhibit 10.106 to the Company’s Form 10-KSB filed on                  August 7, 2003 |

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| **Exhibit                  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **Location**                                                                                                                                                                                  |
|----------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22                            |   | Amended                  Agreement, dated April 11, 2003, between TranStar Systems, Inc.                  and the                  Company                                                                                                                                                                                                                                                                                                                                       |   | Incorporated                  by reference to Exhibit 10.107 to the Company’s Form 10-KSB filed on                  August 7, 2003                                                      |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                          |
| 10.23                            |   | Loan                  Agreement, between the Company and a third party lender, dated                  May 9,                  2003 (a)                  Term Sheet (b)                  Promissory Note (c)                  Warrants                                                                                                                                                                                                                             |   | Incorporated                  by reference to Exhibit 10.108 to the Company’s Form 10-KSB filed on                  August 7, 2003                                                      |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                          |
| 10.24                            |   | Loan                  Agreement, between the Company and a third party lender, dated                  May 9, 2003                   (a)                  Term Sheet (b)                  Promissory Note (c)                  Warrants                                                                                                                                                                                                                            |   | Incorporated                  by reference to Exhibit 10.109 to the Company’s Form 10-KSB filed on                  August 7, 2003                                                      |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                          |
| 10.25                            |   | Loan,                  agreement, between the Company and a third party lender  (a)                  Term Sheet, dated June 25, 2003  (b)                  $90,000 note, dated June 26, 2003 (c)                  Pledge Agreement, dated June 26, 2003                                                                                                                                                                                                           |   | Incorporated                  by reference to Exhibit 10.111 to the Company’s Form 10-QSB for the                  quarter ended March 31, 2003, filed on June 22, 2004                 |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                          |
| 10.26                            |   | Loan                  Agreement, dated September 4, 2003, between the Company and Victor                  Weber (a)                  Term Sheet (b)                  $50,000 Promissory Note                                                                                                                                                                                                                                                                           |   | Incorporated                  by reference to Exhibit 10.113 to the Company’s Form 10-QSB for the                  quarter ended March 31, 2003 filed on June 22, 2004                  |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                          |
| 10.27                            |   | $500,000                  Farias Loan Agreement between Now Solutions and the Company and                  Robert                  Farias, dated February 13, 2004  (a)                  Loan Agreement (b)                  Promissory Note, issued by Now Solutions (c)                  Security Agreement between Robert Farias and Now Solutions (d)                  Ownership Pledge Agreement between Robert Farias and the                  Company |   | Incorporated                  by reference to Exhibit 10.114 to the Company’s Form 10-QSB for the                  quarter ended March 31, 2003 filed on June 22, 2004                  |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                          |
| 10.28                            |   | Arglen                  Settlement between Arglen Acquisitions, LLC and the Company  (a)                  Arglen Settlement Agreement, dated December 4, 2004  (b)                  Promissory Note, dated February 13, 2004, issued by Now Solutions                  to the                  Arglen Acquisitions, LLC (c)                  Security Agreement, dated February 13, 2004                                                                          |   | Incorporated                  by reference to Exhibit 10.115 to the Company’s Form 10-QSB for the                  quarter ended March 31, 2003 filed on June 22, 2004                  |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                          |
| 10.29                            |   | Employment                  Agreement between Now Solutions, Inc. and Vertical Computer Systems,                  Inc.                  and Sheri Pantermuehl, dated March 1, 2004                                                                                                                                                                                                                                                                                               |   | Incorporated                  by reference to Exhibit 10.115 to the Company’s Form 10-QSB for the                  quarter ended March 31, 2003 filed on June 22,                  2004 |

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| **Exhibit                  No.** |   | **Description**                                                                                                                                                                                                                                                                                             |   | **Location**                                                                                                                                     |
|----------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.30                            |   | Loan                  Amendment, dated June 15, 2004 between WAMCO 32 Ltd. and the Company                  and                  Now Solutions  (a)                  Amendment Number Five to Loan and Security Agreement  (b)                  Amended and Restated Secured Term Promissory Note |   | Incorporated                  by reference to Exhibit 10.117 to the Company’s Form 10-KSB filed on                  January 18, 2005  |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.31                            |   | Weber                  Loans Amendment, between the Company and Victor Weber, dated September                  28,                  2004                                                                                                                                                                    |   | Incorporated                  by reference to Exhibit 10.118 to the Company’s Form 10-KSB filed on                  January 18, 2005       |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.32                            |   | Amendment                  to Consulting Agreement and $7,500 Promissory Note, between the                  Company                  and Stephen Rossetti, dated October 12, 2004                                                                                                                           |   | Incorporated                  by reference to Exhibit 10.119 to the Company’s Form 10-KSB filed on                  January 18, 2005       |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.33                            |   | Order                  Accepting Settlement Offer of Vertical Computer Systems, Inc.,                  Implementing Settlement and Staying Proceedings to Implement                  Settlement                                                                                                             |   | Incorporated                  by reference to Exhibit 99.1 to the Company’s Form 8-K filed on April 7,                  2005               |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.34                            |   | Order                  Instituting Cease-and-Desist Proceedings, Making Findings and Imposing                  a                  Cease-and-Desist Order Pursuant to Section 21C of the Securities                  Exchange                  Act of 1934                                                   |   | Incorporated                  by reference to Exhibit 99.2 to the Company’s Form 8-K filed on April 7,                  2005               |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.35                            |   | Order                  Dismissing Proceedings without Prejudice as to Vertical Computer                  Systems,                  Inc.                                                                                                                                                                     |   | Incorporated                  by reference to Exhibit 99.1 to the Company’s Form 8-K filed on April 19,                  2005              |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.36                            |   | Letter                  Payout Agreement, dated August 24, 2004 entered into by the                  Company.                                                                                                                                                                                               |   | Incorporated                  by reference to Exhibit 99.1 to the Company’s Form 8-K filed on August 31,                  2005             |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.37                            |   | Form                  of Agreed Judgment                                                                                                                                                                                                                                                                    |   | Incorporated                  by reference to Exhibit 99.2 to the Company’s Form 8-K filed on August 31,                  2005             |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.38                            |   | Settlement                  Agreement and Promissory Note, dated October 19, 2005 between the                  Company                  and Parker Mills Morin, LLP                                                                                                                                         |   | Incorporated                  by reference to Exhibit 10.41 to the Company’s Form 10-KSB filed on April                  14, 2006          |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.39                            |   | Amended                  and Restated Term Secured Promissory Note in the principal amount                  of                  $600,000.00, payable by NOW Solutions to Taladin, Inc.                                                                                                                      |   | Incorporated                  by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February                  24, 2006           |
|                             |   |                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                             |
| 10.40                            |   | Secured                  Term Promissory Note in the principal amount of $450,000.00, payable                  by                  Taladin, Inc. to Tara Financial Services, Inc.                                                                                                                           |   | Incorporated                  by reference to Exhibit 10.2 to the Company’s Form 8-K filed on February                  24, 2006           |

----

| **Exhibit                  No.** |   | **Description**                                                                                                                                                                                                              |   | **Location**                                                                                                                             |
|----------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
| 10.41                            |   | Secured                  Term Promissory Note in the principal amount of $150,000.00, payable                  by                  Taladin, Inc. to Strategic Growth Partners, Inc.                                          |   | Incorporated                  by reference to Exhibit 10.3 to the Company’s Form 8-K filed on February                  24, 2006   |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 10.42                            |   | Agreement                  dated as of February 13, 2006 among Tara Financial Services, Inc.,                  as                  lender, NOW Solutions, the Company, Robert Farias, and Robert                  Mokhtarian |   | Incorporated                  by reference to Exhibit 10.4 to the Company’s Form 8-K filed on February                  24, 2006   |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 10.43                            |   | Secured                  Term Promissory Note in the principal amount of $359,559.90, payable                  by                  NOW Solutions to Tara Financial Services, Inc.                                            |   | Incorporated                  by reference to Exhibit 10.5 to the Company’s Form 8-K filed on February                  24, 2006   |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 10.44                            |   | Secured                  Term Promissory Note in the principal amount of $438,795.31, payable                  by                  the Company to Tara Financial Services, Inc.                                              |   | Incorporated                  by reference to Exhibit 10.6 to the Company’s Form 8-K filed on February                  24, 2006   |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 10.45                            |   | Secured                  Term Promissory Note in the principal amount of $955,103.30, payable                  by                  NOW Solutions to Tara Financial Services, Inc.                                            |   | Incorporated                  by reference to Exhibit 10.7 to the Company’s Form 8-K filed on February                  24, 2006   |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 10.46                            |   | Secured                  Term Promissory Note, dated October 27, 2006, in the principal                  amount of                  $100,000, payable by Taladin to Victor T. Weber.                                         |   | Provided                  herewith                                                                                                       |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 14.1                             |   | Code                  of Ethics                                                                                                                                                                                              |   | Incorporated                  by reference to Exhibit 14.1 to the Company’s Form 10-KSB filed on January                  18, 2005 |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 21.1                             |   | Subsidiaries                  of the Company                                                                                                                                                                                 |   | Provided                  herewith                                                                                                       |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 31.1                             |   | Certification                  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley                  Act of 2002, dated April 16, 2006                                                                   |   | Provided                  herewith                                                                                                       |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 31.2                             |   | Certification                  of Principal Accounting Officer Pursuant to Section 302 of the                  Sarbanes-Oxley Act of 2002, dated April 16, 2006                                                              |   | Provided                  herewith                                                                                                       |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 32.1                             |   | Certification                  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley                  Act of 2002, dated April 16, 2006                                                                   |   | Provided                  herewith                                                                                                       |
|                             |   |                                                                                                                                                                                                                         |   |                                                                                                                                     |
| 32.2                             |   | Certification                  of Principal Accounting Officer Pursuant to Section 906 of the                  Sarbanes-Oxley Act of 2002, dated April 16, 2006                                                              |   | Provided                  herewith                                                                                                       |

----

**(b)**
**Reports      on Form 8-K: **

**ITEM        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

***Audit      Fees.***

***Tax      Fees***

***All      Other Fees.***

----

**SIGNATURES**

|                          |                                               |                                |
|-------------------------------|----------------------------------------------------|-------------------------------------|
|                          | **VERTICAL                COMPUTER SYSTEMS, INC.** |
|                     |                                          |                           |
| April                16, 2007 | By:                                      | /s/              Richard Wade  |
|                          | Richard                Wade, President and         |
|                          | Chief                Executive Officer             |

|                          |                                        |                                               |
|-------------------------------|---------------------------------------------|----------------------------------------------------|
|                     |                                   |                                          |
| April                16, 2007 | By:                               | /s/              Luiz              Valdetaro  |
|                          | Luiz                Valdetaro               |
|                          | Principal                Accounting Officer |

|                          |                                  |                                |
|-------------------------------|---------------------------------------|-------------------------------------|
|                          | **DIRECTORS:**                        |
|                     |                             |                           |
| April                16, 2007 | By:                         | /s/              Richard Wade  |
|                          | Richard                Wade, Director |

|                          |                                   |                                 |
|-------------------------------|----------------------------------------|--------------------------------------|
|                     |                              |                            |
| April                16, 2007 | By:                          | /s/              William Mills  |
|                          | William                Mills, Director |

----

**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**INDEX      TO CONSOLIDATED FINANCIAL STATEMENTS**

| Report                of Independent Registered Public Accounting Firm |   |   | F-2    |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                   |   |   |   |   |
| Consolidated                Financial Statements                       |   |   |   |   |
| Consolidated                Balance Sheets                             |   |   | F-3    |   |
| Consolidated                Statements of Operations                   |   |   | F-5    |   |
| Consolidated                Statements of Stockholders’ Equity   |   |   | F-6    |   |
| Consolidated                Statements of Cash Flows                   |   |   | F-8    |   |
|                                                                   |   |   |   |   |
| Notes                to Consolidated Financial Statements              |   |   | F-9    |   |

----

**Report      of Independent Registered Public Accounting Firm**

----

**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

|                                                                                                       |   | December                31, |       |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                       |   | 2006                        |       | 2005 |   |
| **Assets**                                                                                                 |   |                        |       |   |   |
|                                                                                                       |   |                        |       |   |   |
| Current                assets:                                                                             |   |                        |       |   |   |
| Cash                                                                                                       |   | $                           | 83,482     |   | $ | 285,366 |   |
| Securities                available for sale                                                               |   |                        | 2,760      |   |   | 2,760 |   |
| Accounts                receivable, net of allowance for bad debts of $167,980 and                $160,480 |   |                        | 863,907    |   |   | 1,011,806 |   |
| Other                receivable                                                                            |   |                        | 110,085    |   |   | 110,085 |   |
| Employee                receivables                                                                        |   |                        | 86,010     |   |   | 47,548 |   |
| Prepaid                expenses and other assets                                                           |   |                        | 41,750     |   |   | 83,046 |   |
|                                                                                                       |   |                        |       |   |   |   |   |
| Total                current assets                                                                        |   |                        | 1,187,995  |   |   | 1,540,611 |   |
|                                                                                                       |   |                        |       |   |   |   |   |
| Property                and equipment, net of accumulated depreciation                                     |   |                        | 83,611     |   |   | 96,703 |   |
| Other                intangibles, net                                                                      |   |                        | -          |   |   | 153,716 |   |
| Deposits                and other                                                                          |   |                        | 9,958      |   |   | 10,372 |   |
|                                                                                                       |   |                        |       |   |   |   |   |
| Total                assets                                                                                |   | $                           | 1,281,564  |   | $ | 1,801,402 |   |
|                                                                                                       |   |                        |       |   |   |   |   |
| **Liabilities,                Convertible Preferred Stock and Stockholder’s                Deficit** |   |                        |       |   |   |   |   |
|                                                                                                       |   |                        |       |   |   |   |   |
| Current                liabilities:                                                                        |   |                        |       |   |   |   |   |
| Accounts                payable and accrued liabilities                                                    |   | $                           | 6,251,710  |   | $ | 5,806,381 |   |
| Deferred                revenue                                                                            |   |                        | 2,659,522  |   |   | 2,559,532 |   |
| Accrued                income taxes                                                                        |   |                        | -          |   |   | 18,000 |   |
| Current                portion-convertible debentures                                                      |   |                        | 40,000     |   |   | 230,000 |   |
| Current                portion-notes payable                                                               |   |                        | 2,544,682  |   |   | 4,140,571 |   |
|                                                                                                       |   |                        |       |   |   |   |   |
| Total                current liabilities                                                                   |   |                        | 11,495,914 |   |   | 12,754,484 |   |
|                                                                                                       |   |                        |       |   |   |   |   |
| Non                current portion - Notes payable                                                         |   |                        | 3,183,249  |   |   | 1,190,734 |   |
| Accrued                dividends                                                                           |   |                        | 3,513,712  |   |   | 2,913,712 |   |
|                                                                                                       |   |                        |       |   |   |   |   |
| Total                liabilities                                                                           |   | $                           | 18,192,875 |   | $ | 16,858,930 |   |

----

**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS (Continued)**

|                                                                                                                                                                 |   | December                31, |        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                                                                 |   | 2006                        |        | 2005 |   |
|                                                                                                                                                                 |   |                        |        |   |   |
| **Stockholders’                Equity (Deficit)**                                                                                                              |   |                        |        |   |   |
| Series                A 4% Convertible Cumulative Preferred stock; $0.001 par value; 250,000                shares authorized; 48,500 shares issued and outstanding; |   |                        | 49          |   |   | 50 |   |
| Series                B 10% Convertible Preferred stock; $0.001 par value; 375,000 shares                authorized; 7,200 shares issued and outstanding;            |   |                        | 45,000      |   |   | 45,000 |   |
| Series                C 4% Convertible Preferred stock; $100 par value; 200,000 shares                authorized; 50,000 shares issued and outstanding;              |   |                        | 350,000     |   |   | 350,000 |   |
| Series                D 15% Convertible Preferred stock; $0.001 par value; 300,000 shares                authorized; 25,000 shares issued and outstanding;           |   |                        | 156,250     |   |   | 156,250 |   |
|                                                                                                                                                                 |   |                        |        |   |   |   |   |
| Common                stock: $.00001 par value, 1,000,000,000 shares authorized 996,926,857                and                947,291,670 issued and outstanding     |   |                        | 9,970       |   |   | 9,473 |   |
|                                                                                                                                                                 |   |                        |        |   |   |   |   |
| Additional                paid-in capital                                                                                                                            |   |                        | 28,208,434  |   |   | 27,723,121 |   |
| Accumulated                deficit                                                                                                                                   |   |                        | (45,802,957 | ) |   | (43,474,248 | ) |
| Accumulated                other comprehensive income                                                                                                                |   |                        | 121,943     |   |   | 132,826 |   |
|                                                                                                                                                                 |   |                        |        |   |   |   |   |
| Total                stockholders’ deficit                                                                                                                     |   |                        | (16,911,311 | ) |   | (15,057,528 | ) |
|                                                                                                                                                                 |   |                        |        |   |   |   |   |
| Total                liabilities and stockholders’ deficit                                                                                                     |   | $                           | 1,281,564   |   | $ | 1,801,402 |   |

*See      accompanying notes to consolidated financial statements.*

----

**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

|                                                            |   | Years                ended December 31, |        |
|-----------------------------------------------------------------|--------|-----------------------------------------|-------------|
|                                                            |   | 2006                                    |        | 2005 |   |
| Revenues                                                        |   |                                    |        |    |   |
|                                                            |   |                                    |        |    |   |
| Licensing                and maintenance                        |   | $                                       | 5,152,017   |   | $ | 5,126,271 |   |
| Consulting                Services                              |   |                                    | 911,308     |   |   | 1,227,306 |   |
| Other                                                           |   |                                    | 166,619     |   |   | 246,642 |   |
|                                                            |   |                                    |        |   |   |   |   |
| Total                Revenues                                   |   |                                    | 6,229,944   |   |   | 6,600,219 |   |
|                                                            |   |                                    |        |   |   |   |   |
| Selling                , general and administrative expenses    |   |                                    | 7,370,783   |   |   | 7,605,874 |   |
|                                                            |   |                                    |        |   |   |   |   |
| Operating                loss                                   |   |                                    | (1,140,839  | ) |   | (1,005,655 | ) |
|                                                            |   |                                    |        |   |   |   |   |
| Interest                income                                  |   |                                    | 3,026       |   |   | 3,950 |   |
| Interest                expense                                 |   |                                    | (590,896    | ) |   | (505,059 | ) |
|                                                            |   |                                    |        |   |   |   |   |
| Net                loss                                         |   |                                    | (1,728,709  | ) |   | (1,506,764 | ) |
|                                                            |   |                                    |        |   |   |   |   |
| Dividend                applicable to preferred stock           |   |                                    | (600,000    | ) |   | (600,000 | ) |
|                                                            |   |                                    |        |   |   |   |   |
| Net                loss applicable to common stockholders       |   | $                                       | (2,328,709  | ) | $ | (2,106,764 | ) |
|                                                            |   |                                    |        |   |   |   |   |
| Basic                and diluted loss per share                 |   | $                                       | (0.00       | ) | $ | (0.00 | ) |
|                                                            |   |                                    |        |   |   |   |   |
| Basic                and diluted weighted average               |   |                                    | 983,001,187 |   |   | 888,580,402 |   |
| of                common shares outstanding                     |   |                                    |        |   |   |   |   |
|                                                            |   |                                    |        |   |   |   |   |
| Comprehensive                loss and its components            |   |                                    |        |   |   |   |   |
| consist                of the following:                        |   |                                    |        |   |   |   |   |
| Net                loss                                         |   | $                                       | (1,728,709  | ) | $ | (1,506,764 | ) |
| Unrealized                loss on securities available for sale |   |                                    | -           |   |   | (6,368 | ) |
| Translation                adjustments                          |   |                                    | 12,126      |   |   | (1,244 | ) |
| Comprehensive                loss                               |   | $                                       | (1,716,583  | ) | $ | (1,514,376 | ) |

*See      accompanying notes to consolidated financial statement*

----

**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**STATEMENTS      OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**YEARS      ENDED DECEMBER 31, 2006 AND 2005**

|                                                                             |   |                          |         |                             |   | Additional   |   |        |         | Other         |   |         |   |
|----------------------------------------------------------------------------------|--------|-------------------------------|--------------|----------------------------------|--------|--------------|--------|-------------|--------------|---------------|--------|--------------|--------|
|                                                                             |   | Common                  Stock |         | Preferred                  Stock |   | Paid-in      |   | Accumulated |         | Comprehensive |   |         |   |
|                                                                             |   | Shares                        |         | Amount                           |   | Shares       |   | Amount      |         | Capital       |   | Deficit      |   | Income |   | Total |   |
| Balance                  at 12/31/04                                             |   |                          | 867,768,895  |                             | **$**  | 8,678        |   |        | 132,200      |          | **$**  | 551,300      |   | **$** | 27,385,191 |   | **$** | (41,367,483 | ) | **$** | 140,438 |   | **$** | (13,281,876 | ) |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuing                  common shares for failure to make loan payments         |   |                          | 2,700,000    |                             |   | 27           |   |        |         |          |   |         |   |   | 19,373 |   |   |   |   |   |   |   |   | 19,400 |   |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuing                  common shares for services to be rendered               |   |                          | 1,500,000    |                             |   | 15           |   |        |         |          |   |         |   |   | 4,935 |   |   |   |   |   |   |   |   | 4,950 |   |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuing                  common shares for failure to file SB-2 Registration     |   |                          | 5,000,000    |                             |   | 50           |   |        |         |          |   |         |   |   | 82,223 |   |   |   |   |   |   |   |   | 82,273 |   |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuing                  restricted stock, net of cancellations                  |   |                          | -            |                             |   | -            |   |        |         |          |   |         |   |   | 2,421 |   |   |   |   |   |   |   |   | 2,421 |   |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuing                  common shares upon conversion of convertible debentures |   |                          | 69,322,775   |                             |   | 693          |   |        |         |          |   |         |   |   | 223,988 |   |   |   |   |   |   |   |   | 224,681 |   |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                  of warrants in the third quarter of 2005             |   |                          | 1,000,000    |                             |   | 10           |   |        |         |          |   |         |   |   | 4,990 |   |   |   |   |   |   |   |   | 5,000 |   |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  loss for the year ended December 31, 2005                   |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   | (1,506,764 | ) |   |   |   |   | (1,506,764 | ) |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accrued                  dividends for preferred stock                           |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   | (600,000 | ) |   |   |   |   | (600,000 | ) |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                  comprehensive income translation adjustment               |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   | (1,244 | ) |   | (1,244 | ) |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized                  loss on investment                                   |   |                          |    |                             |   |    |   |        |    |          |   |    |   |   |    |   |   |    |   |   | (6,368 | ) |   | (6,368 | ) |
|                                                                             |   |                          |         |                             |   |         |   |        |         |          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                  12/31/05                                                |   |                          | 947,291,670  |                             | **$**  | 9,473        |   |        | 132,200      |          | **$**  | 551,300      |   | **$** | 27,723,121 |   | **$** | (43,474,248 | ) | **$** | 132,826 |   | **$** | (15,057,528 | ) |

*See      accompanying notes to consolidated financial statements*

----

**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**STATEMENTS      OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**YEARS      ENDED DECEMBER 31, 2006 AND 2005**

|                                                                                                           |   |                            |         |                               |   |         |   |        |         | Additional    |   |         |   | Other  |         |   |   |
|----------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------------|------------------------------------|--------|--------------|--------|-------------|--------------|---------------|--------|--------------|--------|--------|--------------|--------|--------|
|                                                                                                           |   | Common                    Stock |         | Preferred                    Stock |   | Paid-in      |   | Accumulated |         | Comprehensive |   |         |   |
|                                                                                                           |   | Shares                          |         | Amount                             |   | Shares       |   | Amount      |         | Capital       |   | Deficit      |   | Income |         | Total  |   |
| Balance                    at 12/31/05                                                                         |   |                            | 947,291,670  |                               | **$**  | 9,473        |   |        | 132,200      |          | **$**  | 551,300      |   | **$**  | 27,723,121   |   | **$**  | (43,474,248 | ) | **$** | 132,826 |   | **$** | (15,057,528 | ) |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Issuing                    common shares for incentive to make loans and refinance                    debt     |   |                            | 13,000,000   |                               |   | 130          |   |        |         |          |   |         |   |   | 158,870      |   |   |   |   |   |   |   |   | 159,000 |   |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Issuing                    restricted stock, net of cancellations                                              |   |                            | 5,449,998    |                               |   | 55           |   |        |         |          |   |         |   |   | 79,705       |   |   |   |   |   |   |   |   | 79,759 |   |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Issuing                    common shares upon conversion of convertible debentures                             |   |                            | 24,298,094   |                               |   | 242          |   |        |         |          |   |         |   |   | 189,757      |   |   |   |   |   |   |   |   | 189,999 |   |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Issuing                    common shares upon damages claimed with an equity line of                    credit |   |                            | 4,387,095    |                               |   | 44           |   |        |         |          |   |         |   |   | 40,756       |   |   |   |   |   |   |   |   | 40,800 |   |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Conversion                    of 1,500 of preferred A to common shares                                         |   |                            | 750,000      |                               |   | 8            |   |        | (1,500       | )             |   | (2           | )      |   | (6           | )      |   |   |   |   |   |   |   | - |   |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Issuing                    common shares upon debt forgiveness                                                 |   |                            | 1,750,000    |                               |   | 18           |   |        |         |          |   |         |   |   | 16,231       |   |   |   |   |   |   |   |   | 16,249 |   |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Net                    loss for the year ended December 31, 2006                                               |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   | (1,728,709 | ) |   |   |   |   | (1,728,709 | ) |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Accrued                    dividends for preferred stock                                                       |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   | (600,000 | ) |   |   |   |   | (600,000 | ) |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Other                    comprehensive income translation adjustment                                           |   |                            |    |                               |   |    |   |        |    |          |   |    |   |   |    |   |   |    |   |   | (10,883 | ) |   | (10,883 | ) |
|                                                                                                           |   |                            |         |                               |   |         |   |        |         |          |   |         |   |   |         |   |   |   |   |   |   |   |   |   |   |
| Balance                    12/31/06                                                                            |   |                            | 996,926,857  |                               | **$**  | 9,970        |   |        | 130,700      |          | **$**  | 551,299      |   | **$**  | 28,208,434   |   | **$**  | (45,802,957 | ) | **$** | 121,943 |   | **$** | (16,911,311 | ) |

----

**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

|                                                                                                          |   | Years                ended December 31, |       |
|---------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                                                          |   | 2006                                    |       | 2005 |   |
| Cash                flows from operating activities:                                                          |   |                                    |       |   |   |
|                                                                                                          |   |                                    |       |   |   |
| Net                loss                                                                                       |   | $                                       | (1,728,709 | ) | $ | (1,506,764 | ) |
| Adjustments                to reconcile net loss to net cash provided by operating                activities: |   |                                    |       |   |   |   |   |
| Depreciation                and amortization                                                                  |   |                                    | 206,572    |   |   | 850,490 |   |
| Non                employee stock compensation                                                                |   |                                    | 243,051    |   |   | 136,304 |   |
| Employee                stock compensation expense                                                            |   |                                    | 52,758     |   |   | 2,421 |   |
| Allowance                for bad debts                                                                        |   |                                    | 7,500      |   |   | 23,007 |   |
| Changes                in operating assets and liabilities:                                                   |   |                                    |       |   |   |   |   |
| Accounts                receivable                                                                            |   |                                    | 140,399    |   |   | 290,301 |   |
| Receivable                from officers and employees                                                         |   |                                    | (38,462    | ) |   | (30,410 | ) |
| Prepaid                expenses                                                                               |   |                                    | 41,710     |   |   | (59,257 | ) |
| Accounts                payable and accrued liabilities                                                       |   |                                    | 1,029,560  |   |   | 865,913 |   |
| Deferred                Revenue                                                                               |   |                                    | 99,990     |   |   | (119,952 | ) |
|                                                                                                          |   |                                    |       |   |   |   |   |
| Net                cash provided by operating activities                                                      |   |                                    | 54,370     |   |   | 452,053 |   |
|                                                                                                          |   |                                    |       |   |   |   |   |
| Cash                flows from investing activities:                                                          |   |                                    |       |   |   |   |   |
| Purchase                of equipment                                                                          |   |                                    | (39,765    | ) |   | (73,787 | ) |
|                                                                                                          |   |                                    |       |   |   |   |   |
| Net                cash used in investing activities                                                          |   |                                    | (39,765    | ) |   | (73,787 | ) |
|                                                                                                          |   |                                    |       |   |   |   |   |
| Cash                flows from financing activities:                                                          |   |                                    |       |   |   |   |   |
| Payment                of note payable                                                                        |   |                                    | (1,222,606 | ) |   | (422,436 | ) |
| Proceeds                from issuance of notes payable                                                        |   |                                    | 1,017,000  |   |   | - |   |
|                                                                                                          |   |                                    |       |   |   |   |   |
| Net                cash used in financing activities                                                          |   |                                    | (205,606   | ) |   | (422,436 | ) |
|                                                                                                          |   |                                    |       |   |   |   |   |
| Effect                of changes in exchange rates on cash                                                    |   |                                    | (10,882    | ) |   | (1,244 | ) |
|                                                                                                          |   |                                    |       |   |   |   |   |
| Net                increase (decrease) in cash and cash equivalents,                                          |   |                                    | (201,882   | ) |   | (45,414 | ) |
|                                                                                                          |   |                                    |       |   |   |   |   |
| Cash                and cash equivalents,** **beginning                of period                         |   |                                    | 285,366    |   |   | 330,780 |   |
|                                                                                                          |   |                                    |       |   |   |   |   |
| Cash                and cash equivalents, end of period                                                       |   | $                                       | 83,484     |   | $ | 285,366 |   |

*See      accompanying notes to consolidated financial      statements*

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      1. Organization and Basis of Presentation**

** **

**Going      Concern Uncertainty **

**Principles      of Consolidation**

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      2. Summary of Significant Accounting Policies**

**Cash      and Cash Equivalents**

**Revenue      Recognition**

**Concentration      of Credit Risk**

**Property      and Equipment**

**Impairment      of Long-Lived Assets**

**Capitalized      Software Costs**

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      2. Summary of Significant Accounting Policies (Continued)**

**Stock-based      Compensation**

**Investments**

**Income      Taxes**

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      2. Summary of Significant Accounting Policies (Continued)**

**Earnings      Per Share**

**Fair      Value of Financial Instruments**

**Use      of Estimates**

**Advertising      and Tradeshow Costs**

**Cash      Reimbursements**

**Goodwill      and Other Intangible Assets **

** **

----

**VERTICAL          COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      2. Summary of Significant Accounting Policies (Continued)**

**Adoption      of **
**FIN      No. 45**

**Adoption      of SFAS No. 150**

**Adoption      of FIN No. 46**

**Reclassifications**

**Note      3. Acquisition Transactions - Now Solutions Operations and Default on Notes      **

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      3. Acquisition Transactions - Now Solutions Operations and Default on Notes      (Continued)**

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      3. Acquisition Transactions - Now Solutions Operations and Default on Notes      (Continued) **

** **

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      4. Investments **

**Note      5. Related Party Transactions**

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      5. Related Party Transactions (Continued)**

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note        5. Related Party Transactions (Continued)**

**s**

**Note      6. Other Intangible Assets **

|                                               |   | 2006   |       | 2005   |   |
|----------------------------------------------------|--------|--------|------------|--------|--------|
|                                               |   |   |       |   |   |
| Purchased                software source code      |   | $      | 4,753,972  |   | $      | 4,753,972 |   |
| Other                amortizable intangible assets |   |   | 305,337    |   |   | 305,337 |   |
| Accumulated                amortization            |   |   | (5,059,309 | )      |   | (4,905,593 | ) |
|                                               |   |   |       |   |   |   |   |
| Net                other intangible assets         |   | $      | 0          |   | $      | 153,716 |   |

|                                             |   | 2006   |    | 2005   |   |
|--------------------------------------------------|--------|--------|---------|--------|--------|
|                                             |   |   |    |   |   |
| Software                source code              |   | $      | 153,716 |   | $      | 763,440 |   |
| Other                purchased intangible assets |   |   | 0       |   |   | 27,142 |   |
|                                             |   |   |    |   |   |   |   |
| Total                                            |   | $      | 153,716 |   | $      | 790,582 |   |

----

**VERTICAL          COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      7. Property and Equipment **

|                                    |   | 2006   |     | 2005   |   |
|-----------------------------------------|--------|--------|----------|--------|--------|
|                                    |   |   |     |   |   |
| Equipment                               |   | $      | 862,723  |   | $      | 822,960 |   |
| Leasehold                improvements   |   |   | 87,712   |   |   | 87,712 |   |
| Furniture                and fixtures   |   |   | 40,803   |   |   | 40,803 |   |
|                                    |   |   |     |   |   |   |   |
| Total                                   |   |   | 991,238  |   |   | 951,475 |   |
|                                    |   |   |     |   |   |   |   |
| Accumulated                depreciation |   |   | (907,627 | )      |   | (854,772 | ) |
|                                    |   | $      | 83,611   |   | $      | 96,703 |   |

**Note      8. Accounts Payable and Accrued Expenses **

|                                             |   | 2006   |      | 2005   |   |
|--------------------------------------------------|--------|--------|-----------|--------|--------|
|                                             |   |   |      |   |   |
| Accounts                payable                  |   | $      | 2,068,558 |   | $      | 1,398,486 |   |
| Accrued                payroll                   |   |   | 2,079,883 |   |   | 1,733,573 |   |
| Accrued                payroll tax and penalties |   |   | 713,254   |   |   | 706,424 |   |
| Accrued                liabilities               |   |   | 1,390,015 |   |   | 1,967,898 |   |
|                                             |   | $      | 6,251,710 |   | $      | 5,806,381 |   |

**Note      9. Other Receivable**

**Note      10. Notes Payable and Convertible Debts **

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | December                31,  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 2006                         |   | 2005  |   |
| The                $5.5 million note payable, issued by Now Solutions to Coast and purchased                by Wamco was amended in June 2004. Pursuant to the amendment, the                interest                was changed to 9% per annum and the $1,304,766 outstanding principal                balance shall be payable as follows: (a) $91,667 principal per month,                plus                interest commencing on June 30, 2004 and continuing on each succeeding                month through September 30, 2004; (b) $7,500 principal per month,                plus                interest, commencing on October 31, 2004 and continuing on each succeeding                month through January 31, 2005; (c) providing that Now Solutions                has                achieved revenues of $7.5 million and EBITDA of not less than $2,200,000                for the fiscal year 2004, $7,500 principal per month, plus interest,                commencing on February 28, 2005 and continuing on the last day of                each                succeeding month until June 30, 2005; and (d) $91,667 principal per                month                plus interest, commencing on July 31, 2005 and continuing on each                succeeding month until the note is paid. Since Now Solutions did                qualify                for reduced payments, the note was payable in the amount of $91,667                principal per month, plus interest, commencing on February 28, 2005                and                continuing on the last day of each succeeding month until the note                is                paid. In February 2006, Taladin used the proceeds of two loans to                acquire                the indebtedness of Now Solutions to Wamco for $600,000, which represented                a 5% discount from the actual amount owed, plus legal fees. In connection                with the acquisition of such indebtedness, a revenue participation                agreement for the benefit of Wamco was terminated and a warrant to                purchase 3,000,000 shares of common stock of the Company, also granted                to                Wamco, was cancelled. Now Solutions’ indebtedness to Wamco was secured by                a first lien position against all assets of Now Solutions and this                first                lien position was assigned by Wamco to Taladin. |   | $                                 | -      |   | $ | 865,302 |   |

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**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | December                31,  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                              | 2006 |   |   | 2005 |   |
| Note                payable to Ross                issued by Now Solutions in the amount of $1,000,000. The note is                unsecured                and non-interest bearing. The note was recorded at a discount (which                will                be amortized over the life of the note), payments of $250,000 and                $750,000                to be due in February 2002 and 2003, respectively. If a payment is                not                received within three days from the due date, the note will begin                to bear                interest at 10% per annum. In 2002, Now Solutions offset $250,000                payment                through its receivable from Ross in terms of the agreement between                Now                Solutions and Ross. See also Note 15 for information concerning the                legal                proceedings between the Company, Now Solutions and Ross.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                              | 750,000 |   |   | 750,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                              |   |   |   |   |   |
| Note                payable in the amount of $31,859 to a third-party lender, bearing                interest                at an amount to be negotiated, principal and interest due on                demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                              | 31,859 |   |   | 31,859 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                              |   |   |   |   |   |
| Notes                payable in the amount of $27,000 to a third-party, payable upon                demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                              | 27,000 |   |   | 27,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                              |   |   |   |   |   |
| Note                payable to a third-party lender in the amount of a $239,004 bearing                interest at 13% per annum and unsecured, with a $65,000 payment made                in                December 2002, commencing with monthly payment of $7,500 beginning                in                March 2003. This note was issued in 2002 to replace the note of $211,137                issued in August 2001 to a third-party lender, bearing interest at                12% per                annum. In March 2003, the note was amended and the Company agreed                to pay                the interest and expenses responsible by the lender for a third-party                loan                secured on the lender’s behalf instead of paying to the lender and the                Company agreed to begin making monthly payment of $7,500, beginning                on                June 1, 2003*.* Pursuant                to the extension in December 2003, the Company was required to make                monthly installment payments of $7,500, beginning on February 1,                2004,                until the balance under the note has been paid. The note is in default.                                                                                                                                                                                                                                                                                                                                                   |   |                              | 161,504 |   |   | 161,504 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                              |   |   |   |   |   |
| Note                payable in the amount of $50,000 to a third-party lender, bearing                no                interest. In March 2003, the parties entered into an amendment, whereby                the parties agreed to accrue interest beginning in October 2002 at                12% per                annum. The parties also agreed that the Company would make monthly                payments of accrued interests beginning in April 2003 and monthly                principal payment of $5,000 beginning in July 2003. In connection                with the                note, the Company issued three-year warrants to purchase 1,200,000                shares                of its common stock at a price of $0.003 per share. In May 2005,                the                Company and a third party lender amended the terms of the note. Any                existing default on the note was waived, and the Company agreed to                commence monthly payments to the lender of $2,500 in June 2005, which                would be raised to $4,000 beginning in October 2005, and to pay the                lender’s reasonable attorney’s fees. In connection with the agreement the                Company issued 600,000 shares of common stock of the Company (at                a fair                market value of $9,000) to the lender and warrants to purchase 1,200,000                shares of the Company common stock were cancelled by the lender.                The                Company is currently in default. |   |                              | 35,568 |   |   | 47,784 |   |

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**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   | December                31,  |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   | 2006                         |   |   | 2005  |   |
| Note                payable in the amount of $50,000 to a third-party lender, bearing                interest                at the rate of 12% per annum. In March 2003, the parties entered                into an                amendment, whereby the parties agreed to pay accrued interest in                the                amount of $4,200 for this note and to extend the maturity date to                June 1,                2004. Beginning in July 2003, the above interest payments were to                be                replaced with a monthly installment payment of $5,000, with the initial                payments applied first to the $25,000 note (issued below) and then                to the                $50,000 note. In connection with the amendment, the Company issued                three-year warrants to purchase 1,500,000 shares of its common stock                at a                price of $0.004 per share. The note has been in default since April                1,                2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 50,000                            |   |   | 50,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |                              |   |   |   |   |
| Note                payable in the amount of $25,000 to a third-party lender, bearing                interest                at 12% per annum, secured by 10,000,000 shares of the Company’s common                stock that are owned by Mountain Reservoir due in December 2002.                In March                2003, the parties entered into an amendment. Pursuant to the amendment,                the Company agreed to pay accrued interest in the amount of $1,170                for                this $25,000 note and amend the due date to July 1, 2005. Beginning                in                July 2003, the above interest payments shall be replaced with monthly                payments of $5,000 with the initial payments applied first to the                $25,000                note and then to the $50,000 (the above) note issued. The note has                been in                default since April 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   | 12,583                            |   |   | 12,583 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |                              |   |   |   |   |
| Note                payable in the amount of $280,000, bearing interest at 4% per annum                and                issued to Robert Farias on October 31, 2001, was amended by the parties                in                March 2003. Pursuant to the amendment, the payment of principal was                to be                paid in monthly installments in the amount of $5,000, which was increased                to monthly payments of $10,000 beginning in January 2004. All interest                was                due on the day the principal was to be paid in full. In exchange                for the                extensions, the interest rate accrued at the rate of 12% from the                date the                note was issued. In                February 2004, the Company and Mr. Farias amended the $280,000 note                issued                to Mr. Farias on October 31, 2001 and the $181,583 note issued to                Mr.                Farias on October 17, 2002. Any default on these notes was waived,                and the                Company agreed to make the following payments on these notes: (i)                $20,000,                which was paid toward the $181,583 note on February 20, 2004; (ii)                fifty                percent (50%) of the remaining past-due amounts by March 20, 2004;                and                (iii) the all remaining past-due amounts to bring the notes current                by                April 20, 2004. In the event the Company did not pay the amounts                in a                timely manner, then all amounts still owing under these notes was                considered in default and the following shall be applied: (i) all                such                remaining amounts were added to the secured loan amounts and were                subject                to the security interest and pledge agreements under the $84,000                promissory note issued by the Company’s subsidiary, EnFacet, Inc.                (“Enfacet”),                to Mr. Farias on June 1, 2001; (ii) the $14,640 monthly payments                to be                made under the $84,000 note were to be applied to the $280,000 and                $181,583 notes until these notes are paid in full; and (iii) with                respect                to cash proceeds Now Solutions might have received due to a capital                infusion or upfront licensing fees from a reseller that was outside                its                normal scope of business (i.e., not part of software sales in the                regular                course of business), Now Solutions was required to pay 50% of such                proceeds remaining after the $500,000 note payable issued by Now                Solutions                to Mr. Farias on February 13, 2004 had been paid in full toward the                $280,000 and $181,583 notes if the Company was not current in its                payments.** **The                $280,000 note was also secured by SiteFlashTM technology owned by the                Company. In                February 2006, this note and the applicable underlying security interest                were cancelled.                All outstanding debt, plus interest and any fees under the $280,000                note                payable were included under a                $438,795                note payable issued to Tara Financial. For additional details, please                see                the $438,795                note payable in Note 10. |   |   | -                                 |   |   | 237,626 |   |

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**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   | December                31,   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   | 2006                          |   |   | 2005  |   |
| Note                payable in the amount of $181,583 issued to Robert Farias, bearing                interest at 12% per annum, was to be paid as follows: (i) an initial                installment of $10,000 payable upon execution; (ii) monthly payment                of                $5,000 beginning November 5, 2002 and (iii) monthly $10,000 payment                beginning May 15, 2003 until all amounts under the note have been                paid in                full. This note was issued to replace two notes previously issued;                each                had outstanding balance of $100,000 at December 31, 2001. In February                2004, the Company and Mr. Farias amended the $280,000 note issued                to Mr.                Farias on October 31, 2001 and the $181,583 note issued to Mr. Farias                on                October 17, 2002. Any default on these notes was waived, and the                Company                agreed to make the following payments on these notes: (i) $20,000,                which                was paid toward the $181,583 note on February 20, 2004; (ii) fifty                percent                (50%) of the remaining past-due amounts by March 20, 2004; and (iii)                all                remaining past-due amounts to bring the notes current by April 20,                2004.                In the event the Company did not pay the amounts in a timely manner,                then                all amounts still owing under these notes was considered in default                and                the following applied: (i) all such remaining amounts were added                to the                secured loan amounts and were subject to the security interest and                pledge                agreements under the $84,000 promissory note issued by the Company’s                subsidiary, EnFacet, to Mr. Farias on June 1, 2001; (ii) the $14,640                monthly payments to be made under the $84,000 note were applied to                the                $280,000 and $181,583 notes until these notes were to be paid in                full; and                (iii) with respect to cash proceeds Now Solutions might have received                due                to a capital infusion or upfront licensing fees from a reseller that                is                outside its normal scope of business (i.e., not part of software                sales in                the regular course of business), Now Solutions was required to pay                50% of                such proceeds remaining after the $500,000 note payable issued by                Now                Solutions to Mr. Farias on February 13, 2004 had been paid in full                toward                the $280,000 and $181,583 notes if the Company was not current in                its                payments.** **The                note was secured by 10,450,000 shares of the Company’s common stock that                are owned by Mountain Reservoir to cover any shortfall. Mountain                Reservoir                is a corporation controlled by the W5 Family Trust. Mr. Wade, the                President and CEO of the Company, is the trustee of the W5 Family                Trust.                In February 2006, this                note and                the applicable underlying security interests were                cancelled.                All                outstanding debt, plus interest and any fees under the $181,583 note                payable were included under a                $955,103 note payable issued to Tara Financial. For additional details,                please see the $955,103 note payable in Note 10. |   |   | -                                       |   |   | 108,034 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |                                    |   |   |   |   |
| Note                payable in the amount of $215,000 issued by Now Solutions to the                Company                was assigned to Victor Weber in January 2004 in connection with canceling                notes issued to Weber and expenses paid by Weber on behalf of the                Company                that were included in trade accounts payable in the aggregate amount                of                $215,000. In October 2006, the parties amended the Note. The note                provides                for monthly payments made from gross revenues of new sales of emPath                by                Now Solutions and Taladin. The note is due September 27, 2007. Mr.                Weber                is the President and a Director of GIS, a subsidiary of the Company,                and                a member of CW International.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | 215,000                                 |   |   | 215,000 |   |

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | December                31,  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | 2006                         |   |   | 2005  |   |
| Note                payable in the amount of $350,000 issued by EnFacet to a third-party                lender, bearing interest at 8% per annum, unsecured, and due on February                28, 2003. EnFacet is in default subsequent to December 31, 2002.                In                February 2004, the parties amended the terms of the notes. Pursuant                to the                amendment, the parties waived any defaults on the notes and agreed                that                the notes were to be paid as follows: once the Company’s subsidiary, Now                Solutions, had paid off the entire balance due under the $500,000                Note                issued by Now Solutions to Robert Farias on February 13, 2004, 84%                of any                remaining amounts from the final $91,500 installment payment on the                $500,000 note issued by Now Solutions to Robert Farias on February                13,                2004, would be applied to the $350,000 and $90,000 notes on a pro-rata                basis. Thereafter, the Company was to make monthly principal payments                of                $76,860 applied on a pro-rata basis toward the $350,000 and $90,000                notes                until all monies due under these notes were paid. In connection with                the                amendment, Now Solutions entered into a security agreement with the                lender                to guarantee the note. ** **In                February 2006, this                note and                the applicable underlying security interest were cancelled. All                outstanding debt plus interest and any fees under the $350,000                note payable were included under a                $955,103 note payable issued to Tara Financial. For additional details,                please see the $955,103 note payable in Note 10. |   |   | -                                 |   |   | 350,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |                              |   |   |   |   |
| Note                payable in the amount $25,000 promissory note, bearing interest at                10% per                annum, was issued in April 2003 to a consultant of the Company’s                subsidiary, EnFacet, Inc., for past services rendered. The note is                payable                in monthly $1,000 installments beginning in May 2003 to be replaced                by                $2,000 monthly installments beginning in October 2003. The note is                in                default.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   | 25,000                            |   |   | 25,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |                              |   |   |   |   |
| Note                payable in the amount of $17,500, bearing no interest to a third-party                lender in consideration of a loan in the amount of $15,000, was due                in                June 2003. In connection with the note, the Company paid a commitment                fee                of $2,500 and issued five-year warrants to purchase 250,000 shares                of                common stock of the Company at an exercise price of $0.0075 per share                to                the lender. In connection with this and another loan for $15,000                (see                below), the Company also issued five-year warrants to purchase 250,000                shares of common stock of the Company at an exercise price of $0.0075                per                share to a third-party consultant. In                February 2004, the parties amended the terms of the loan. The lender                waived any default on the note and in exchange the Company issued                500,000                unregistered shares of the Company common stock to each lender                (at                a total fair market value of $7,000), and to pay                $8,750 by March 31, 2004 and $8,750 plus all accrued interest by                April 30,                2004 under the note. In July 2006, the Company issued 250,000 unregistered                shares of the common stock of the Company to the third-party lender                pursuant to the lender’s exercise of warrants to purchase the shares for a                total of $1,875. The purchase price was offset against monies owed                under                note payable. This note is in default.                                                                                                                                                                                                                     |   |   | 11,000                            |   |   | 11,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |                              |   |   |   |   |

| Note                payable in the amount of $17,500, bearing no interest to a third-party                lender in consideration of a loan in the amount of $15,000, was due                in                June 2003. In connection with the note, the Company paid a commitment                fee                of $2,500 and issued five-year warrants to purchase 250,000 shares                of                common stock of the Company at an exercise price of $0.0075 per share                to                the lender. In connection with this and another loan for $15,000                (see                above), the Company also issued five-year warrants to purchase 250,000                shares of common stock of the Company at an exercise price of $0.0075                per                share to a third-party consultant. In February 2004, the parties                amended the terms of the loan. The lender waived any default on the                note                and in exchange the Company issued 500,000 unregistered shares of                the                Company common stock to each lender (at a total fair market value                of                $7,000), and to pay $8,750 by March 31, 2004 and $8,750 plus all                accrued                interest by April 30, 2004 under the note. In July 2006, the Company                issued 250,000 unregistered shares of the common stock of the Company                to                the third-party lender pursuant to the lender’s exercise of warrants to                purchase the shares for a total of $1,875. The purchase price was                offset                against monies owed under note payable. This note is in default. |   |   | 11,000 |   |   | 11,000 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|

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**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|   |   |   | December                    31,  |   |
|--------|--------|--------|---------------------------------------|--------|
|   |   |   | 2006                             |   |   | 2005  |   |

| Note                payable in the amount of $10,000 issued by EnFacet to a third-party                lender, bearing interest at 8% per annum, unsecured, with principal                and                interest due on June 1, 2002. EnFacet has been in default since                December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | 10,000 |   |   | 10,000 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |
| Note                payable in the amount of $84,000 issued by EnFacet to Robert Farias,                dated                June 1, 2001, bearing interest at 8% per annum, unsecured, with principal                and interest due on June 1, 2002. EnFacet was in default at December                31,                2002. In March 2003, both parties entered into an amendment. Pursuant                to                the amendment, the due date was extended to March 17, 2004 in exchange                for                increasing the interest rate from 8% to 12% at which interest was                accrued                from the date the note was issued. In addition, EnFacet was to make                monthly payments of $1,000 commencing in April 2003. In February                2004, the                Company and Robert Farias waived any defaults on the note and agreed                that                the note would be payable as follows: once the Company’s subsidiary, Now                Solutions, had paid off the entire balance due under the $500,000                note                issued by Now Solutions to Farias on February 13, 2004, 16% of any                remaining amounts from the final $91,500 installment payment on the                $500,000 note would be applied to the $84,000 note. Thereafter, the                Company or, at the Company’s option, Now Solutions, was to make monthly                principal payments of $14,640 beginning on the first day of the following                month until all monies due under the $84,000 note had been paid.                In                connection with the amendment, Now Solutions entered into a security                agreement with the lender to guarantee the note. In February 2006,                this                note and                the applicable underlying security interest were                cancelled.                All                outstanding debt plus interest and any fees under the $84,000                note payable were included under a                $955,103 note payable issued to Tara Financial. For additional details,                please see the $955,103 note payable in Note 10. |   |   | -      |   |   | 84,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |
| Note                payable in the amount of $10,365 dated January 17, 2003 bearing                an interest of 10% per annum, with principal and interest due on                December                5, 2003. $3,000 in payments was made on this note in 2003. This note                is in                default.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 7,365  |   |   | 7,365  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |
| Note                payable in the amount of $23,030 dated March 21, 2003 bearing                an interest of 12% per annum, with principal and interest due on                April 21,                2004. This note is in default.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | 23,030 |   |   | 23,030 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |

| Note                payable in the amount of $90,000 dated June 26, 2003 to a third-party                bearing                an interest of 10% annum, with principal and interest due on March                28,                2004. In                February 2004, the parties amended the terms of the note. Pursuant                to the                amendment, the parties waived any defaults on the note and agreed                that the                note would be payable as follows: Once the Company’s subsidiary, Now                Solutions, had paid off the entire balance due under the $500,000                note                issued by Now Solutions to Mr. Farias on February 13, 2004, 84% of                any                remaining amounts from the final $91,500 installment payment on the                $500,000 note issued by Now Solutions to Robert Farias on February                13,                2004, would be applied to the $350,000 and $90,000 notes on a pro-rata                basis. Thereafter, the Company would continue to make monthly principal                payments of $76,860 applied on a pro-rata basis to the $350,000 and                $90,000 notes until all monies due under these notes had been paid.                In                connection with the amendment, Now Solutions entered into a security                agreement with the lender to guarantee the note. In February 2006,                this                note and                the applicable underlying security interest were                cancelled.                All                outstanding debt, plus interest and any fees under the $90,000                note payable were included under a                $955,103 note payable issued to Tara Financial. For additional details,                please see the $955,103 note payable in Note 10. |   |   | - |   |   | 90,000 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---|--------|--------|--------|--------|

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|   |   |   | December                  31,  |   |
|--------|--------|--------|-------------------------------------|--------|
|   |   |   | 2006                           |   |   | 2005  |   |

| Note                payable in the amount of $60,000 issued by GIS to a third-party dated                November 5, 2003, bearing an interest of 10% per annum, with principal                and                interest due on November 5, 2004. The Company agreed to issue a 2%                ownership interest of its subsidiary, GIS to the third-party in connection                with this note. In addition, the lender will be entitled to receive                a 2%                royalty on net sales of products by GIS in the United States up to                $300,000 and the Company issued 1,000,000 unregistered                shares                of Company’s common stock (with a fair market value of $5,000). The Note                is secured by 4,000,000 shares of common stock of the Company that                are                owned by Mountain Reservoir. Mountain Reservoir is a corporation                controlled by the W5 Family Trust. Mr. Wade, the President and CEO                of the                Company, is the trustee of the W5 Family Trust. This note is in default.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   | 60,006 |   |   | 60,006  |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|---------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |    |   |
| Note                payable in the amount of $40,000 issued by GIS to a third-party dated                November 19, 2003, bearing an interest of 10% per annum, with principal                and interest due on November 19, 2004. The Company agreed to issue                a 1.5%                ownership interest of its subsidiary, GIS to the third-party in connection                with this note. In addition, the lender will be entitled to receive                a 1.5%                royalty on net sales of products by GIS in the United States up to                $200,000 and the Company issued 1,000,000 unregistered                shares                of Company’s common stock (with a fair market value of $4,000). The Note                is secured by 3,000,000 shares of common stock of the Company that                are                owned by Mountain Reservoir. Mountain Reservoir is a corporation                controlled by the W5 Family Trust. Mr. Wade, the President and CEO                of the                Company, is the trustee of the W5 Family Trust. $5,000 of this note                was                not funded until January 2004. This note is in default.** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   | 40,000 |   |   | 40,000  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |    |   |
| Note                payable in the amount of $500,000 issued by Now Solutions, the Company’s                wholly-owned subsidiary to Robert Farias. This note was secured by                Now                Solutions’ assets. In addition, Farias is entitled to** **a                5% royalty on any sales by Now Solutions of over $8,000,000 up to                $500,000. The note beared interest at 10% per annum and Now Solutions                was                required to make monthly interest payments for all interest accrued                in the                previous month on the first day of each month beginning April 1,                2004 and                beginning on October 1, 2004 and continuing on the first day of every                month thereafter, monthly principal payments of $91,500 plus interest                until the note had been paid in full. In the event Now Solutions                received                cash proceeds due to a capital infusion or upfront licensing fees                from a                reseller that was outside its normal scope of business (i.e., not                part of                software sales in the regular course of business), Now Solutions                was                required to pay 50% of such proceeds remaining toward payment of                the                $500,000 note. In connection with the loan, the Company issued (i)                five-year warrants to purchase 5,000,000 unregistered shares of common                stock at $0.01 per share at a fair market value at the date of issuance                of                $74,538 (valued using the Black-Scholes Option Valuation Model);                (ii)                five-year warrants to purchase 5,000,000 unregistered shares of common                stock of the Company at $0.02 per share at a fair market value at                the date                of issuance of $74,344 (valued using the Black-Scholes Option Valuation                Model); (iii) five-year warrants to purchase 5,000,000 unregistered                shares                of common stock of the Company at $0.03 per share at a fair market                value                at the date of issuance of $74,200 (valued using the Black-Scholes                Option                Valuation Model); (iv) 5,000,000 unregistered shares of common stock                of                the Company (at a fair market value of $75,000); and (v) an additional                5,000,000 unregistered shares of common stock of the Company in the                event                that $250,000 was not paid toward the loan on or before March 15,                2004,                which were issued (at a fair market value of $125,000). All of the                foregoing warrants and stock are subject to “piggy-back” registration                rights. In connection with the loan, Now Solutions entered into a                security                agreement with the lender to guarantee the note. In addition, the                Company                also pledged a 30% ownership interest in Now Solutions to ensure                the                making of the $500,000 loan to Now Solutions. In                February 2006, this note and                the applicable underlying security interest were                cancelled.                All                outstanding debt, plus interest and any fees under the $500,000 note                payable were included under the                $359,560 note payable issued to Tara Financial. For additional details,                please see the $955,103 note payable in Note 10. |   |   | -      |   |   | 317,000 |   |

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**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|   |   |   | December                  31,  |   |
|--------|--------|--------|-------------------------------------|--------|
|   |   |   | 2006                           |   |   | 2005  |   |

| Note                payable in the amount of $5,000 to Mr. James Salz, bearing interest                at 10%                with principal and interest due on demand. Mr. Salz is the Company’s                corporate counsel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   | 5,000   |   |   | 5,000   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |    |   |   |    |   |
| Note                payable in the amount of $10,000 to Mr. James Salz. Mr. Salz is the                Company’s corporate counsel. The note is in default.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   | 10,000  |   |   | 10,000  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |    |   |   |    |   |
| Note                payable in the amount of $600,000 issued to Arglen Acquisitions,                LLC                (“Arglen”)                by the Company pursuant to the Company’s acquisition of Arglen’s 35%                interest in Now Solutions.  The                Company’s purchase of Arglen’s interest resulted in the Company                recognizing $1,680,000 of goodwill, which was written-off in 2004.                The                note is a no-interest bearing secured promissory note providing for                payments of $200,000 in April 2004, $100,000 in June 2004, and $300,000                in                September 2004, which was issued at closing. When the Company did                not make                the April 2004 payment, the Company began accruing interest at the                rate of                10% from the inception of the note. In                August 2004, Arglen obtained a default judgment in Los Angeles court                for                the outstanding principal, plus attorney’s fees and interest at the rate                of 10% per annum. In April 2005, Arglen filed a Notice of Filing                a Foreign                Judgment in Tarrant County, Texas. In August 2005, Company entered                into an                agreement with Arglen allowing payout terms to the Company (the                “Payout                Agreement”)                and pursuant to which the Company agreed to enter into an Agreed                Judgment                for the Foreign Judgment in Tarrant County, Texas (the “Agreed                Judgment”).                The Agreed Judgment and Payout Agreement were entered into concerning                a                California judgment and Arglen's notice of Filing a Foreign Judgment                in                Tarrant County, Texas, which were in connection with the 2003 settlement                agreement (the “2003                Settlement”).                Pursuant to the terms of the Agreed Judgment and the Payout Agreement,                the                Company agreed to pay Arglen a total of $713,489, which includes                the                following amounts: (a) $600,000 in principal on the promissory note                issued                by the Company pursuant to the 2003 Settlement, (b) the accrued                post-judgment interest on the California judgment from September                4, 2004                through September 15, 2005, at the rate of 10% per annum, which equals                $61,989, and (c) attorney's fees incurred for the California and                Texas                judgment actions which were approximately $51,500. Pursuant to the                terms                of the Payout Agreement, the Company began making monthly interest                payments on the amounts specified above of $5,945, beginning on September                15, 2005, which were replaced by monthly payments of $25,000 or 10%                of the                Company's new sales, whichever is greater, beginning on February                15, 2006                until the remainder of the $713,489 is paid. In accordance with the                Payout                Agreement, Arglen shall not execute the Agreed Judgment so long as                the                Company continues to make its payments as agreed. For                additional details, see Note 15, “Litigation”. |   |   | 438,489 |   |   | 713,489 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |    |   |   |    |   |
| Note                payable in the amount of $75,000 issued by the Company, bearing interest                at a rate of 6% to the law firm of PMM in October 2005. The note                was                issued in connection with a lawsuit filed by PMM to collect the                outstanding balance of $23,974 due under the promissory note issued                to                them by the Company and for failure to pay fees for professional                services                in the amount of $89,930 rendered to the Company, plus interest.                The                $75,000 note has a maturity date of January 31, 2008 and shall be                paid in                equal monthly installments of $3,125, beginning February 1, 2006                for a                period of 24 months. Bill Mills is a Director of the Company and                a partner                of PMM. The note is delinquent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   | 58,318  |   |   | 75,000  |   |

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|   |   |   | December                  31,  |   |
|--------|--------|--------|-------------------------------------|--------|
|   |   |   | 2006                           |   |   | 2005  |   |

| Note                payable in the amount of $992,723 issued by Now Solutions, the Company’s                wholly-owned subsidiary to Wolman Blair, PLLC on November 30, 2005.                The                note is secured with the assets of Now Solutions and bears interest                at the                rate of 12% compounded annually. The note was issued in connection                with                refinancing outstanding legal fees and expenses (which where owed                pursuant                to the legal services retainer agreement), together with interest                accrued                as of the date the note was issued. The note is payable as follows:                (a)                $12,500 by December 15, 2005; (b) $30,000 by December 30, 2005; (c)                $25,000 by January 10, 2006; (d) $12,500 by January 20, 2006; (e)                $25,000                by February 1, 2006; and (f) equal monthly installments of $40,000,                each,                commencing March 1, 2006, and continuing on the first day of each                month                thereafter, until March 1, 2008, upon which date all outstanding                principal                and interest shall be due. In connection with the loan, Now Solutions                entered into a security agreement with the lender to guarantee the                note.                The note is in default.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 992,723 |   |   | 992,                723 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |    |   |   |                    |   |
| Note                payable in the amount of $450,000 issued by Taladin to Tara Financial,                dated February 13, 2006. The note bears interest at the rate of 12%                per                annum. The note was issued in connection with refinancing whereby                Taladin                acquired the indebtedness of Now Solutions to Wamco. The note is                secured                by Taladin’s first lien position on the assets of Now Solutions. Tara                Financial SGP and Mr. Weber share the first lien position, senior                to all                other security interests in the assets of Now Solutions. The $450,000                note                payable is payable as follows: (a) principal and interest payments                of                $7,000, on the first day of the month, beginning March 1, 2006, and                continuing through September 1, 2006; (b) interest only, beginning                on                October 1, 2006, and continuing through December 31, 2006; (c) unpaid                principal balance and interest payments of $7,000, beginning on January                1,                2007 and continuing through February 1, 2008; and (d) monthly payments                increased $12,700, beginning on March 1, 2008 and continuing until                February 1, 2011 (the maturity date). The $450,000 note payable by                Taladin                contains provisions requiring additional principal reductions in                the event                sales by Now Solutions exceed certain financial thresholds or if                there is                a judgment in favor of the Company with respect to the pending Ross                litigation. For additional details on the Ross litigation, please                see                “Litigation” under Note 15. The $450,000 note also contains a conversion                option pursuant to which all or any portion of the unpaid principal,                plus                interest, may be converted at the option of Tara Financial, into                shares of                common stock of Taladin equal to a maximum of 2.5% of Taladin’s                outstanding common stock at the time of conversion. As incentives                to make                the loan and to refinance approximately $1.75 million of existing                debt,                the Company issued 5,000,000 shares of common stock of the Company                (at a                fair market value of $45,000), agreed to issue 4% of the common stock                of                GIS, and pay to Tara Financial 4% of the proceeds received by the                Company                (including litigation proceeds) related to the USPTO Patent No. 6,826,744                for an invention for “System and Method for Generating Web Sites in an                Arbitrary Object Framework” owned by the Company. Furthermore, Now                Solutions agreed to pay Tara Financial a 6% royalty from gross revenues                in                excess of $6.5 million, up to a cap of $2,640,606. For an update                on an                extension by Tara Financial regarding this note, please see “Subsequent                Events” in Note 16. |   |   | 435,023 |   |   | -                       |   |

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|   |   |   | December                  31,  |   |
|--------|--------|--------|-------------------------------------|--------|
|   |   |   | 2006                           |   |   | 2005  |   |

| Note                payable in the amount of $150,000 issued by Taladin to SGP, dated                February                13, 2006. The note bears interest at the rate of 12% per annum. The                note                was issued in connection with refinancing whereby Taladin acquired                the                indebtedness of Now Solutions to Wamco. The note is secured by Taladin’s                first lien position on the assets of Now Solutions. Tara Financial                SGP and                Mr. Weber share the first lien position, senior to all other security                interests in the assets of Now Solutions. The $150,000 note payable                is                payable as follows: (a) principal and interest payments of $2,334,                on the                first day of the month, beginning April 1, 2006, and continuing through                September 1, 2006; (b) interest only, beginning on October 1, 2006,                and                continuing through December 31, 2006; (c) unpaid principal balance                and                interest payments of $2,334, beginning on January 1, 2007 and continuing                through February 1, 2008; and (d) monthly payments increased $4,233,                beginning on March 1, 2008 and continuing until March 1, 2011 (the                “Maturity                Date”).                The $150,000 note payable by Taladin contains provisions requiring                additional principal reductions in the event sales by Now Solutions                exceed                certain financial thresholds or if there is a judgment in favor of                the                Company with respect to the pending Ross litigation. For additional                details on the Ross litigation, please see “Litigation” under Note 15. As                incentives to make the $150,000 loan, the Company issued 3,000,000                shares                of the common stock of the Company (at a fair market value of $27,000)                and                Now Solutions** **agreed                to pay SGP a 1.5% royalty from its gross revenues in excess of $6.5                million, up to a cap of $150,000. |   |   | 145,868 |   |   | -      |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |    |   |   |   |   |
| Note                payable in the amount of $438,795 issued by the Company to Tara Financial,                on February 13, 2006. The note bears interest at the rate of 12%                per                annum. The note was issued in connection with refinancing whereby                Tara                Financial acquired certain indebtedness under a $280,000 note payable,                dated October 31, 2001, issued by the Company to Robert Farias. The                $438,795 note payable reflects all outstanding debt, plus accrued                interest                and any fees under the $280,000 note payable. The $280,000 note was                cancelled and any underlying security interests have been released.                The                $438,795 note payable is payable as follows: (a) principal and interest                payments of $5,763, on the first day of the month, beginning March                1,                2006, and continuing through September 1, 2006; (b) interest only                beginning on October 1, 2006, and continuing through December 31,                2006;                (c) unpaid principal balance and interest payments of $5,763, beginning                on                January 1, 2007 and continuing until February 1, 2018. The new note                is                secured by an interest in certain technology developed by Adhesive                Software and owned by the Company, commonly known as “SiteFlashTM”. For an                update on an extension by Tara Financial regarding this note, please                see                “Subsequent Events” in Note 16                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | 427,134 |   |   | -      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |    |   |   |   |   |
| Note                payable in the amount of $359,560, issued by Now Solutions to Tara                Financial, dated February 13, 2006. The note bears interest at the                rate of                12% per annum. The note was issued in connection with refinancing                whereby                Tara Financial acquired certain indebtedness under a $500,000 note                payable, dated February 13, 2004, issued by Now Solutions to Robert                Farias. The $359,560 note payable reflects all outstanding debt,                plus                accrued interest and any fees under the $500,000 note payable. The                $500,000 note was secured by the assets of Now Solutions, as well                as a                pledge of a portion of the Company’s ownership of Now Solutions. The                original $500,000 note was cancelled. In connection with the cancellation,                a royalty agreement for the benefit of Mr. Farias has also been cancelled.                The $359,560 note payable is payable as follows: (a) principal and                interest payments of $4,723, on the first day of the month, beginning                March 1, 2006, and continuing through September 1, 2006; (b) interest                only                payments, beginning on October 1, 2006, and continuing through December                31, 2006; (c) unpaid principal balance and interest of $4,723, beginning                on January 1, 2007 and continuing until February 1, 2018 (the maturity                date). The new note is secured by all of the assets of Now Solutions.                This                note payable also contains provisions requiring additional principal                reductions in the event sales by Now Solutions exceed certain financial                thresholds. For an update on an extension by Tara Financial regarding                this                note, please see “Subsequent Events” in Note 16.                                                                                                                                                                                                                                                                      |   |   | 350,006 |   |   | -      |   |

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|   |   |   | December                  31,  |   |
|--------|--------|--------|-------------------------------------|--------|
|   |   |   | 2006                           |   |   | 2005  |   |

| Note                payable in the amount of $955,103, issued by Now Solutions to Tara                Financial, dated February 13, 2006. The note bears interest at the                rate of                12% per annum, has a maturity date in the year 2018 and is payable                in                various installments of principal and interest. The note was issued                in                connection with refinancing whereby Tara Financial acquired certain                indebtedness under the following four notes: (a) an $84,000 note                payable,                issued by EnFacet, the Company’s 100% owned subsidiary to Robert Farias,                dated June 1, 2001 which had an outstanding balance at the time of                the                consolidation of $137,841; (b) a $181,583 note payable issued by                the                Company to Robert Farias, dated October 17, 2002, which had an outstanding                balance at the time of the consolidation of $181,905; (c) a $350,000                note                payable, issued by EnFacet to a third party, dated August 15, 2001,                which                had an outstanding balance at the time of the consolidation of $519,693;                and (d) a $90,000 note payable issued by the Company to a third party,                dated June 26, 2003, which had an outstanding balance at the time                of the                consolidation of $115,663. All four notes were cancelled and all                related                security interests under these notes have been released. The $955,103                note                payable is payable as follows: (a) principal and interest payments                of                $12,5441, on the first day of the month, beginning March 1, 2006,                and                continuing through September 1, 2006; (b) interest only payments,                beginning on October 1, 2006, and continuing through December 31,                2006;                (c) unpaid principal balance and interest payments of $12,544, beginning                on January 1, 2007, and continuing until February 1, 2018 (the maturity                date). The new $955,103 note payable is secured by all of the assets                of                Now Solutions. This note payable also contains provisions requiring                additional principal reductions in the event sales by Now Solutions                exceed                certain financial thresholds. For an update on an extension by Tara                Financial regarding this note, please see “Subsequent Events” in Note                16. |   |   | 929,721 |   |   | -      |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |    |   |   |   |   |
| Note                payable in the amount of $51,000 issued by the company to a third                party                lender, bearing interest at 10% per annum. The note was issued in                connection with a $50,000 loan and includes $1,000 in legal fees.                In                connection with the loan, the Company issued 1,000,000 unregistered                shares                of common stock of the Company (at a fair-market value of $18,000).                The                note is in default.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   | 51,000  |   |   | -      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |    |   |   |   |   |
| Note                payable in the amount of $200,000 issued by Taladin to Mr. Weber,                dated                October 24, 2006. The note bears interest at the rate of 12% per                annum.                The note was issued in connection with advances of $200,000 to                TrueBaseline, Inc. toward securing additional rights to StatePointPlus®                and IA (formerly ImmuneApp). Pursuant to the note, the Company shall                a                percentage of gross revenues derived from all sales of StatePointPlus®                (not to exceed $1.00 per user per month) until the balance under                the note                is paid. The Company shall pay accrued interest from the previous                month on                a monthly basis and make minimum payments on the balance of the note                as                follows: (a) $60,000 is due 6 months from the date of the note, (b)                $30,000 is due 7 months from the date of the note, (c) $30,000 is                due 8                months from the date of the note; (d) $30,000 is due 9 months from                the                date of the note; and (e) all outstanding principal and interest                then                outstanding is due 11 months from the date of the note. In connection                with                the note, Mountain Reservoir pledged 5,000,000 shares of common stock                of                the Company to secure the note to the Company. Mountain Reservoir                is a                corporation controlled by the W5 Family Trust. Mr. Wade, the President                and                CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber                is                the President and a Director of GIS and a member of CWI. For details                on                the amendment to the note, please see “Subsequent Events” in Note                16.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   | 200,000 |   |   | -      |   |

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

|   |   |   | December                  31,  |   |
|--------|--------|--------|-------------------------------------|--------|
|   |   |   | 2006                           |   |   | 2005  |   |

| Note                payable in the amount of $100,000 issued by Taladin to Mr. Weber,                dated                October 27, 2006. The note bears interest at the rate of 12% per                annum.                The note is secured by Taladin’s first lien position on the assets of Now                Solutions. Tara Financial, SGP and Mr. Weber share the first lien                position, senior to all other security interests in the assets of                Now                Solutions. The $100,000 note payable is payable as follows: (a) interest                only, beginning on November 1, 2006, and continuing through December                1,                2006; (b) unpaid principal balance and interest payments of $1,556,                beginning on January 1, 2007 and continuing through February 1, 2008;                and                (c) monthly payments increased $2,822, beginning on March 1, 2008                and                continuing until March 1, 2011 (the “Maturity                Date”).                The $100,000 note payable by Taladin contains provisions requiring                additional principal reductions in the event sales by Now Solutions                exceed                certain financial thresholds or if there is a judgment in favor of                the                Company with respect to the pending Ross litigation. For additional                details on the Ross litigation, please see “Litigation” under Note 15. Mr.                Weber is the President and a Director of GIS and a member of                CWI. |   |   | 100,000    |   |   | -          |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |       |   |   |       |    |
| Note                Payable in the amount of $113,734 issued by Now Solutions to Stephen                Rossetti in December 2006, bearing interest at 10% per annum. The                note was                issued in connection with the cancellation of a $66,000 note payable                issued to Mr. Rossetti in July 2006 and approximately $56,000 in                fees owed                to Markquest, Inc. Mr. Rossetti is Executive Vice-President of Government                Affairs, Chairman, CEO and Director of GIS, Director of Now Solutions                and                an officer of Markquest, Inc. The note is amortized over 24 months                with                monthly payments beginning in January 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   | 113,734    |   |   | -          |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |       |   |   |       |    |
| Total                notes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 5,727,931  |   |   | 5,331,305  |    |
| Current                maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | (2,544,682 | )      |   | (4,140,571 | )  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |       |   |   |       |    |
| Long-Term                portion of notes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | $      | 3,183,249  |   | $      | 1,190,734  |    |

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      10. Notes Payable and Convertible Debts (Continued)**

|        |   |   | **Year**                      |        |                  | **Amount**      |   |
|--------|--------|--------|------------------------------------|--------|-----------------------|-----------------|--------|
|   |   |   | 2007                               |   | $                     | 2,544,682       |   |
|   |   |   | 2008                               |   |                  | 883,029         |   |
|   |   |   | 2009                               |   |                  | 623,027         |   |
|   |   |   | 2010                               |   |                  | 298,754    |   |
|        |   |   | 2011+          |   |                  | 1,378,439       |   |
|   |   |   | Total                notes payable |   |                $ | 5,727,931  |   |

**Convertible      Debentures**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | December                31, |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                        | 2006   |   |   | 2005 |   |
| Convertible                debentures dated March 29, 2002, bearing interest at 5%, convertible                into                shares of the Company’s common stock at either 120% of the closing bid                price on the date of agreement or 80% of the lowest closing bid price                five                days prior to the conversion. The debenture is convertible at the                option                of the holder at any time after purchase. Principal and interest                were due                at maturity on March 28, 2004. This debenture was originally issued                in the                principal amount of $100,000 debenture issued.                                                                                                                                    |   |                        | 10,000 |   |   | 10,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                        |   |   |   |   |   |
| Convertible                debentures dated April 14, 2003, bearing no interest, convertible                into                shares of common stock at 100% of the lowest closing bid price three                days                prior to conversion. The debenture could be redeemed for 100% of                the any                portion of the principal that has not been converted by the holder                as of                the date of the notice of redemption. Principal                was due at maturity in April                2006. As of December 31, 2006, the entire $190,000 of principal and                $40,800 in liquidated damages were converted into 24,298,094 and                4,387,095                unregistered shares of the common stock of the Company,                respectively. |   |                        | -      |   |   | 190,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                        |   |   |   |   |   |
| In                December 2003, the Company issued a debenture in the amount of $30,000                to                a third party. The Company received net proceeds of $26,000 for the                debenture. The debt accrues interest at 5% per annum and was due                December                2005. The holder may convert the debenture into shares of common                stock at                100% of the closing price for the preceding trading day after the                Company                receives notice of conversion.                                                                                                                                                                                                                                                                               |   |                        | 30,000 |   |   | 30,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                        |   |   |   |   |   |
| Total                convertible debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                        | 40,000 |   |   | 230,000 |   |
| Current                maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                        | 40,000 |   |   | 230,000 |   |
| Long-term                portion of convertible debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $                           | -      |   | $ | - |   |

**Note      11. Income Taxes **

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**VERTICAL      COMPUTER SYSTEMS, INC. AND      SUBSIDIARIES**

**Note      11. Income Taxes (Continued)**

|                                                     |   | Years                ended December 31,  |       |
|----------------------------------------------------------|--------|-----------------------------------------------|------------|
|                                                     |   |  2006                                    |       |  2005 |   |
| Loss                before income taxes in Vertical      |   | $                                             | (1,333,840 | ) | $ | (1,215,293 | ) |
| Loss                before income taxes in Now Solutions |   |                                          | (394,869   | ) |   | (291,471 | ) |
|                                                     |   |                                          |       |   |   |   |   |
|                                                     |   | $                                             | (1,728,709 | ) | $ | (1,506,764 | ) |

|                                      |   |   | Years                ended December 31, |   |
|-------------------------------------------|--------|--------|-----------------------------------------|--------|
|                                      |   |   | 2006                                    |   |   | 2005 |   |
| Current                                   |   |   |                                    |   |   |   |   |
|                                      |   |   |                                    |   |   |   |   |
| Federal:                                  |   |   |                                    |   |   |   |   |
| Vertical                                  |   | $      | -                                       |   | $ | - |   |
| Now                Solutions              |   |   | -                                       |   |   | - |   |
| State:                                    |   |   |                                    |   |   |   |   |
| Vertical                                  |   |   | -                                       |   |   | - |   |
| Now                Solutions              |   |   | -                                       |   |   | - |   |
|                                      |   |   |                                    |   |   |   |   |
|                                      |   |   | -                                       |   |   | - |   |
| Deferred                expense (benefit) |   |   |                                    |   |   |   |   |
| Vertical                                  |   |   | -                                       |   |   | - |   |
| Now                Solutions              |   |   | -                                       |   |   | - |   |
|                                      |   |   |                                    |   |   |   |   |
|                                           |   |   | -                                       |   |   | - |   |
|                                      |   |   |                                    |   |   |   |   |
| Total                income tax provision |   | $      | -                                       |   | $ | - |   |

|                                         |   | December                31, |   |
|----------------------------------------------|--------|-----------------------------|--------|
|                                         |   | 2006                        |   | 2005 |   |
| Expected                statutory rate       |   | (34.0                       | )%     | (34.0 | )% |
| Change                in valuation allowance |   |                        | 42.8   |   |   | 41.2 |   |
| State                                        |   |                        | (8.8   | ) |   | (7.6 | ) |
| Other                                        |   |                        | 0.0    |   |   | 0.4 |   |
|                                         |   |                        |   |   |   |   |   |
|                                         |   |                        | (0     | )% |   | (0 | )% |

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**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note        11. Income Taxes (Continued)**

|                                                                |   | December                31, |        |
|---------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                |   |                        | 2006        |   |   | 2005 |   |
| Net                operating loss carryforward                      |   | $                           | 8,160,000   |   | $ | 7,553,000 |   |
| Accrued                vacation and allowance for doubtful accounts |   |                        | 66,000      |   |   | 56,000 |   |
| Deferred                revenue                                     |   |                        | 760,000     |   |   | 502,000 |   |
| Deferred                salary                                      |   |                        | 815,000     |   |   | 690,000 |   |
| Other                                                               |   |                        | 375,000     |   |   | 375,000 |   |
|                                                                |   |                        |        |   |   |   |   |
|                                                                |   |                        | 10,176,000  |   |   | 9,176,000 |   |
|                                                                |   |                        |        |   |   |   |   |
| Valuation                allowance                                  |   |                        | (10,176,000 | ) |   | (9,176,000 | ) |
|                                                                |   |                        |        |   |   |   |   |
|                                                                |   | $                           | -           |   | $ | - |   |

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**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note        12. Stockholders’ Equity**

**2005**

**Common      Stock**

**Preferred      Stock**

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**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      12. Stockholders’ Equity (Continued)**

**2006**

** **

** **

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**VERTICAL      COMPUTER SYSTEMS, INC. AND      SUBSIDIARIES**

**Note      12. Stockholders’ Equity (Continued)**

**Preferred      Stock**

**Note      13. Stock Options and Warrants**

**2005**

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**VERTICAL        COMPUTER SYSTEMS, INC. AND        SUBSIDIARIES**

**Note            13. Stock Options and Warrants (Continued)**

**2006**

|                                                                             |   |   | Incentive                Stock Options  |   |   | Non-Statutory                Stock Options |   |   | Warrants    |   |   | Weighted                Average                Exercise Price |   |
|----------------------------------------------------------------------------------|--------|--------|----------------------------------------------|--------|--------|--------------------------------------------|--------|--------|-------------|--------|--------|---------------------------------------------------------------|--------|
| Outstanding                at 12/31/04                                           |   |   | 4,000,000                                    |   |   | -                                          |   |   | 84,932,758  |   |   | 0.092                                                         |   |
| Options/Warrants                granted with an exercise price of $0.01 to $0.03 |   |   | -                                            |   |   | -                                          |   |   | 4,500,000   |   |   | 0.016                                                         |   |
| Options/Warrants                exercised                                        |   |   | -                                            |   |   | -                                          |   |   | 1,000,000   |   |   | 0.005                                                         |   |
| Options/Warrants                expired/cancelled                                |   |   | -                                            |   |   | -                                          |   |   | (36,321,647 | )      |   | 0.068                                                         |   |
|                                                                             |   |   |                                         |   |   |                                       |   |   |        |   |   |                                                          |   |
| Outstanding                at 12/31/05                                           |   |   | 4,000,000                                    |   |   | -                                          |   |   | 52,111,111  |   |   | 0.039                                                         |   |
| Options/Warrants                granted with an exercise price of $0.01 to $0.03 |   |   | -                                            |   |   | -                                          |   |   | -           |   |   | -                                                             |   |
| Options/Warrants                exercised                                        |   |   | -                                            |   |   | -                                          |   |   | 1,750,000   |   |   | 0.009                                                         |   |
| Options/Warrants                expired/cancelled                                |   |   | 1,500,000                                    |   |   | -                                          |   |   | 21,966,667  |   |   | 0.045                                                         |   |
|                                                                             |   |   |                                         |   |   |                                       |   |   |        |   |   |                                                          |   |
| Outstanding                at 12/31/06                                           |   |   | 2,500,000                                    |   |   | -                                          |   |   | 28,394,444  |   |   | 0.034                                                         |   |

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**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      13. Stock Options and Warrants (Continued)**

|                                         |   | Warrants/Options                Outstanding  | Exercisable                   |
|-----------------------------------------|--------|---------------------------------------------------|-------------------------------|
| Exercise                Price Per Share |   |                                              | Number  Outstanding |   |   | Weighted Average Remaining ContractualLife                          (Months) |  |   | Weighted                        AverageExercisePrice |   |   |  NumberExercisable |   |   | Weighted                        AverageExercisePrice |   |
| Incentive                Stock Options  |   |                                              |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| $0.01                - $0.09            |   |                                              | 2,500,000                     |   |   | 35.50 |   | $ | 0.014 |   |   | 2,500,000 |   | $ | 0.014 |   |
|                                    |   |                                              |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   |                                              | 2,500,000                     |   |   | 35.50 |   | $ | 0.014 |   |   | 2,500,000 |   | $ | 0.014 |   |
|                                    |   |                                              |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Warrants                                |   |                                              |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| $0.003                - $0.100          |   |                                              | 28,394,444                    |   |   | 18.82 |   | $ | 0.035 |   |   | 28,394,444 |   | $ | 0.035 |   |
| $0.100                - $0.350          |   |                                              | -                             |   |   | - |   |   | - |   |   | - |   |   | - |   |
|                                    |   |                                              |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   |                                              | 28,394,444                    |   |   | 18.82 |   | $ | 0.035 |   |   | 28,394,444 |   | $ | 0.035 |   |
|                                    |   |                                              |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Grand                total              |   |                                              | 30,894,444                    |   |   | 20.17 |   | $ | 0.0337 |   |   | 30,894,444 |   | $ | 0.034 |   |

|                                                                     |   | December                31,  |
|---------------------------------------------------------------------|--------|-----------------------------------|
|                                                                |   |                              | 2006 |   |   | 2005 |   |
| Discount                rate –                bond yield rate |   |                              | 5.59 | % |   | 3.83 | % |
| Volatility                                                          |   |                              | 139.40 | % |   | 606.39 | % |
| Expected                life                                        |   |                              | 5                years |   |   | 5                years |   |
| Expected                dividend yield                              |   |                              | - |   |   | - |   |

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**VERTICAL      COMPUTER SYSTEMS, INC. AND      SUBSIDIARIES**

**Note      14. Supplemental Disclosure of Cash Flow Information**

|                                       |   | December                31,  |
|---------------------------------------|--------|-----------------------------------|
|                                  |   |                              | 2006 |   |   | 2005 |   |
| Cash                paid for interest |   | $                                 | 310,033 |   | $ | 228,234 |   |

|                                                                                                                                           |   | December                31,  |      |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                                                                                                           |   | 2006                         |      | 2005  |   |
| Series                A cumulative stock dividends                                                                                             |   | $                                 | 400,000   |   | $ | 400,000 |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Series                C cumulative stock dividends                                                                                             |   |                              | 200,000   |   |   | 200,000 |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Conversion                of debentures to 69,322,775 shares of common stock                                                                   |   |                              | -         |   |   | 224,681 |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Conversion                of debentures to 24,298,094 shares of common stock                                                                   |   |                              | 189,999   |   |   | - |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Conversion                of warrants to 1,000,000 shares of common stock                                                                      |   |                              | -         |   |   | 5,000 |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Conversion                of accounts payable and accrued liabilities to notes                payable                                          |        |                                   | 602,231   |   |   | 1,148,161 |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Issuance                of 1,500,000 shares of the Company’s common stock for professional                services                       |   |                              | -         |   |   | 4,950 |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Issuance                of common stock for failure to make loan payment                                                                       |   |                              | -         |   |   | 19,400 |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| 4,387,095                shares of common stock issued for damages claimed with an equity                line of                credit         |   |                              | 40,800    |   |   | - |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Issuance                of 13,000,000 shares of common stock for incentive to refinance debt                and                obtain new debt |   |                              | 159,000   |   |   | - |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Restricted                stock for employee and consultant compensation expense                                                               |   |                              | 79,759    |   |   | 2,421 |   |
|                                                                                                                                           |   |                              |      |   |   |   |   |
| Issuance                of 1,750,000 shares of common stock for debt forgiveness                                                               |   |                              | 16,250    |   |   | - |   |
|                                                                                                                                           |   | $                            | 1,688,039 |   | $ | 2,004,613 |   |

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**VERTICAL      COMPUTER SYSTEMS, INC. AND      SUBSIDIARIES**

**Note      15. Commitments and Contingencies**

**Commitments      **

| *Years                ending December 31,* |   | *Amount* |    |
|--------------------------------------------|--------|----------|---------|
| 2007                                       |   | 61,742   |    |
| 2008                                       |   |     | 53,556  |   |
| 2009                                       |   |     | 40,167  |   |
|  Total                                |   | $        | 155,465 |   |

**Commitments      Related to Now Solutions **

**Royalties**

**Employment      Contracts**

** **

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**VERTICAL      COMPUTER SYSTEMS, INC. AND      SUBSIDIARIES**

**Note      15. Commitments and Contingencies (Continued)**

**Payroll      Taxes**

**Litigation      **

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**VERTICAL      COMPUTER SYSTEMS, INC. AND      SUBSIDIARIES**

**Note      15. Commitments and Contingencies (Continued)**

** **

----

**VERTICAL        COMPUTER SYSTEMS, INC. AND        SUBSIDIARIES**

**Note        15. Commitments and Contingencies (Continued)**

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**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      15. Commitments and Contingencies (Continued)**

**Matters      Involving the United States Securities and Exchange      Commission**

**Note      16. Subsequent Events **

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**VERTICAL        COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      16. Subsequent Events (Continued)**

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**VERTICAL      COMPUTER SYSTEMS, INC. AND SUBSIDIARIES**

**Note      16. Subsequent Events (Continued)**

| 999,535,193   |   | Common                Stock Issued                                                                                                  |
|---------------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
| 26,577,777    |   | Common                Shares that may be purchased from outstanding Warrants (or have been                purchased but not issued) |
| 1,250,000     |   | Common                Shares that have been purchased from outstanding Warrants but not                issued                       |
| 2,500,000     |   | Common                Shares convertible from Outstanding Options                                                                   |
| 24,250,000    |   | Common                Shares convertible from Preferred Series A stock (48,500 shares                outstanding)                   |
| 27,274        |   | Common                Shares convertible from Preferred Series B stock (7,200 shares                outstanding)                    |
| 20,000,000    |   | Common                Shares convertible from Preferred Series C (50,000 shares                outstanding)                         |
| 94,700        |   | Common                Shares convertible from Preferred Series D (25,000 shares                outstanding)                         |
| 9,500,000     |   | Common                Shares that the Company has agreed to issue pursuant to agreements                                            |
| 1,083,734,944 |   | **Total                Common Shares Outstanding and Accounted                For/Reserved**                                        |

----