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FalconStor Software Announces Q3 Quarterly Results Revenues Increase 43% from Prior Year

MELVILLE, N.Y., October 25, 2007—FalconStor Software, Inc. (NASDAQ: FALC), the market leader in disk-based data protection solutions, today announced financial results for its third quarter ended September 30, 2007.

Revenues for the third quarter of 2007 increased 43% to $18.5 million, compared with $13.0 million for the same period a year ago. Net income for the quarter was $6.3 million, or $0.12 per diluted share, which includes $2.1 million in expenses related to stock-based compensation and an income tax benefit of $4.5 million, compared with a net loss of $1.3 million, or $0.03 per diluted share, in Q3 2006, which included $2.4 million in expenses related to stock-based compensation.

The income tax benefit of $4.5 million recorded in the third quarter of 2007 was primarily associated with the reversal of deferred tax asset valuation allowances in response to continuing favorable developments in operating results and financial projections.

Pro forma income before income taxes, which excludes stock-based compensation expense, was $3.9 million or $0.07 per diluted share in the third quarter of 2007, compared with pro forma income before income taxes of $1.2 million or $0.02 per diluted share for the third quarter of 2006. Pro forma operating margins increased to 17% in the third quarter of 2007 compared with pro forma operating margins of 5% in the same period a year ago.

For the nine months ended September 30, 2007, revenues increased 51% to $52.6 million, compared with $34.8 million for the same period a year ago. Net income for the nine-month period was $7.1 million, or $0.13 per diluted share, which includes $6.2 million in stock-based compensation expense and an income tax benefit of $4.6 million, compared with a net loss of $6.2 million, or $0.13 per diluted share, in the same period a year ago which included $7.1 million in stock-based compensation expense. Pro forma income before income taxes, which excludes stock-based compensation expense, was $8.7 million, or $0.17 per diluted share, compared with pro forma income before income taxes of $1.0 million, or $0.02 per diluted share, in 2006.

The Company closed the quarter with $59.8 million in cash, cash equivalents and marketable securities. Cash flow from operations was $6.5 million in the quarter and $18.0 million year to date. Deferred revenue at September 30, 2007 was $17.6 million, which increased 47% compared with the same period a year ago.

“We are pleased with the consistent expansions of our product portfolio, strategic partners, sales channel and operating margins," said ReiJane Huai, Chairman and CEO of FalconStor. “Besides continuing growth in the enterprise space, we will be creating additional growth drivers by leveraging our software to enable our OEM partners and distributors to create easy-to-deploy turnkey appliances to expand our market coverage to include remote offices and mid-range accounts.”

The company will host a conference call on Thursday, October 25th at 4:30 p.m. ET, to discuss the results. To participate in the conference call, please dial:

Toll Free: 1 866-249-5225
International: 1 303-262-2137

To view the presentation, please copy and paste the following link into your browser and register for this meeting. Once you have registered for the meeting, you will receive an email message confirming your registration.

https://falconstor.webex.com/falconstor/j.php?ED=102987297&RG=1&UID=0

Meeting: FalconStor Q3 2007 Earnings
Meeting password: q3numbers
Meeting Number: 483 737 776

A conference call replay is scheduled to be available beginning 10/25 at 6:30 PM ET through 11:59 PM ET on 10/30. To listen to the replay of the call, dial toll free: 1 800-405-2236 or International: 1 303-590-3000, passcode: 11099526#, or visit our website at www.falconstor.com/investors.asp

Non-GAAP Financial Measures

The non-GAAP financial measures used in this press release are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. The Company´s management refers to these non-GAAP financial measures in making operating decisions because they provide meaningful supplemental information regarding the Company´s operating performance. In addition, these non-GAAP financial measures facilitate management´s internal comparisons to the Company´s historical operating results and comparisons to competitors´ operating results. We include these non-GAAP financial measures (which should be viewed as a supplement to, and not a substitute for, their comparable GAAP measures) in this press release because we believe they are useful to investors in allowing for greater transparency to supplemental information used by management in its financial and operational decision-making. For a reconciliation of our GAAP and non-GAAP financial results, please refer to our ProForma Condensed Consolidated Statements of Operations, presented in this release.

About FalconStor
FalconStor Software, Inc. (NASDAQ: FALC) is the market leader in disk-based data protection. We deliver proven, comprehensive data protection solutions that facilitate the continuous availability of business-critical data with speed, integrity, and simplicity. Our technology-independent solutions, built upon the award-winning IPStor® virtualization platform, include the industry-leading VirtualTape Library (VTL) with Single Instance Repository (SIR) for de-duplication, Continuous Data Protection (CDP), Storage Virtualization, and Replication for disaster recovery and remote office protection. Our products are available from major OEMs and solution providers including EMC, SUN, Brocade, H3C, and COPAN and are deployed by thousands of customers worldwide, from small businesses to Fortune 1000 enterprises.

FalconStor is headquartered in Melville, New York, with offices throughout Europe and the Asia Pacific region. FalconStor is an active member of the Storage Networking Industry Association (SNIA). For more information, visit www.falconstor.com or call 1-866-NOW-FALC (866-669-3252).

 

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This press release includes forward-looking statements that involve risk and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties include: delays in product development; market acceptance of FalconStor´s products and services; technological change in the storage and networking industries; competition in the network storage software market; the potential failure of FalconStor´s OEM partners to introduce or to market products incorporating FalconStor´s products; intellectual property issues; and other risk factors discussed in FalconStor´s reports on Forms 10-K, 10-Q and other reports filed with the Securities and Exchange Commission.




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