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FalconStor Software Announces Q2 Quarterly Results Revenues Increase 33% from Prior Year and 38% from Previous Quarter

MELVILLE, N.Y., July 27, 2006—FalconStor Software, Inc. (NASDAQ: FALC), the leading developer of proven data protection solutions, today announced financial results for its second quarter ended June 30, 2006.

Revenues for the second quarter of 2006 increased 33% to $12.7 million, compared with $9.5 million for the same period a year ago. Net loss for the quarter was $1.3 million or $0.03 per share, which includes $2.4 million in expenses related to employee stock options. Pro forma net income for the second quarter of 2006, excluding employee stock option expense, was $1.1 million or $0.02 per share, compared with net income of $0.3 million or $0.01 per share for the second quarter of 2005.

For the six months ended June 30, 2006, revenues increased 22% to $21.9 million, compared with $17.9 million for the same period a year ago. Net loss for the six month period was $4.9 million or $0.10 per share, which includes $4.7 million in expenses related to employee stock options. Pro forma net loss for the six month period, excluding employee stock option expense, was $0.3 million or $0.01 per share, compared with net income of $0.2 million and breakeven earnings per share for the same period a year ago.

Compared with the previous quarter, revenues increased 38% from $9.2 million in the first quarter of 2006 to $12.7 million in the second quarter of 2006. Net loss for the second quarter was $1.3 million or $0.03 per share, which includes $2.4 million in expenses related to employee stock options, compared with a net loss of $3.6 million or $0.08 per share in the first quarter, which includes $2.3 million in expenses related to employee stock options. Excluding employee stock option expenses, pro forma net income increased to $1.1 million or $0.02 per share in the second quarter of 2006 compared with a pro forma net loss of $1.4 million or $0.03 per share in the first quarter of 2006.

The Company closed the quarter with $39.5 million in cash, cash equivalents and marketable securities and recorded its seventh consecutive quarter of positive cash flows from operations. During the second quarter of 2006, the Company repurchased 250,000 shares of Common Stock for a total cost of $1.7 million. Deferred revenue at June 30, 2006, increased to $11.1 million, or by 10%, compared with the previous quarter, and by 61% compared with the same period a year ago.

“We are pleased with our Q2 business performance and the adoption of our technology by strategic partners around the world.” said ReiJane Huai, Chairman and CEO of FalconStor. “We are confident about our product's competitive position and our ability to leverage partnerships to expand market coverage and channel distribution to realize the growth potential ahead of us.”

The company will host a conference call on Thursday, July 27th at 4:30 p.m. EDT, to discuss the results. To participate in the conference call, please dial:
Toll Free: 866-249-5225
International: 303-262-2142

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=91244992&RG=1

Meeting Name: FalconStor Q2 2006 Earnings
Meeting password: q2numbers
Meeting Number: 489 898 710

A conference call replay will be available beginning 7/27 at 6:30 PM EDT through 6:30 PM on 7/29. To listen to the replay of the call, dial toll free: 800-405-2236 or International: 303-590-3000, pass code: 11066186#, or visit our website at www.falconstor.com/investors.

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 premier developer of adaptive data protection solutions that optimize data center efficiency and business continuity for all IT infrastructures. The company´s innovative storage virtualization, continuous data protection (CDP), disaster recovery, and virtual tape library (VTL) solutions integrate seamlessly to ensure rapid data recovery and simplified storage management. Available from major OEMs, system integrators, and resellers, FalconStor products — including award-winning IPStor®, VirtualTape Library, and DiskSafe™ software — are deployed worldwide by governments, educational institutions, and Fortune 1000 enterprises across industries including aerospace, energy production, financial services, healthcare, law, manufacturing, and telecommunications.

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 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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