FalconStor Software Files Third Quarter 10-Q

MELVILLE, N.Y., November 16, 2010— FalconStor Software, Inc. (NASDAQ: FALC), the provider of TOTALLY Open™ data protection solutions, announced that it filed its Quarterly Report on Form 10-Q for the third quarter of 2010.

Total revenues for the third quarter of 2010 were $19.0 million, a decrease of 6% over the previous quarter and down 12% compared with the same period a year ago.  GAAP loss from operations for the third quarter of 2010 was $4.8 million, down from $5.1 million in the previous quarter and up from $2.5 million for the same period a year ago.

Non-GAAP loss from operations was $2.6 million in the third quarter of 2010, down from $2.8 million in the previous quarter and up from a $0.2 million loss for the same period a year ago.

For the nine months ended September 30, 2010, revenues were $56.4 million, compared with $67.0 million for the same period a year ago.  GAAP loss from operations for the nine month period was $18.4 million compared with a loss of $3.0 million in 2009.

Non-GAAP loss from operations was $11.3 million for the nine months ended September 30, 2010, compared with non-GAAP income from operations of $3.7 million in 2009.

GAAP net loss was $26.4 million, or $0.58 per share for the three months ended September 30, 2010, and $35.3million, or $0.78 per share for the nine-month period ended September 30, 2010.  The net loss includes tax provisions of $21.8 million and $17.0 million for the three and nine months ended September 30, 2010, respectively. During the third quarter of 2010, the Company concluded that its domestic deferred tax assets could not be realized on a more-likely-than-not basis, therefore a valuation allowance of $16.2 million was required to be recorded on these previously recognized deferred tax assets.  This valuation allowance had no cash impact and was recorded within the tax provision for the three and nine months ended September 30, 2010.

GAAP net loss for the three and nine months ended September 30, 2009 was $2.0 million, or $0.05 per share, and $1.6 million, or $0.04 per share, respectively.

Non-GAAP operating results exclude stock-based compensation expenses of $2.2 million for the three months ended September 30, 2010 and 2009 and $2.3 million for the three months ended June 30, 2010.  For the nine months ended September 30, 2010 and 2009, non-GAAP operating results exclude stock-based compensation expense of $7.2 million and $6.7 million, respectively.

The Company closed the quarter with $33.8 million in cash, cash equivalents, and marketable securities.  Deferred revenue at September 30, 2010 was $20.5 million.

“Gartner and others agree that traditional backup is broken due to exponential data growth, server virtualization, and round-the-clock demands on mission-critical applications – and it is in FalconStor’s DNA to address this problem,” said Jim McNiel, interim president and interim CEO of FalconStor Software.  “We have the technology and the expertise to redefine data protection to match the way IT directors view their data center – as a collection of services.  As a result, we are building the industry’s first service-oriented data protection solution for primary data centers and the cloud. It is upon this foundation that we expect to grow our business.”

The Company will host a conference call to discuss its financial results on Tuesday, November 16, 2010 at 8:00 a.m. EST. To participate in the conference call, please dial:

Toll Free: 1-877-941-6012 
International: +1-480-248-5085

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.


Meeting: FalconStor Q3 2010 Earnings 
Meeting password: q3numbers 
Meeting Number: 484 349 617

If you are unable to register via the Internet, please contact Joanne Ferrara, Investor Relations at 631-773-5813 or joanne.ferrara@falconstor.com.

A conference call replay is scheduled to be available beginning November 16, 2010 at 10:30 a.m. EST through 11:59 p.m. EST on November 20, 2010. To listen to the replay of the call, dial toll free: 1-800-406-7325 or International: +1-303-590-3030, passcode: 4386406, 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 into the supplemental information used by management in its financial and operational decision-making. The non-GAAP financial measures exclude noncash stock-based compensation charges for all periods presented. For a reconciliation of our GAAP and non-GAAP financial results, please refer to our Reconciliation of GAAP to Non-GAAP Financial Measures, which is included in this press release.

About FalconStor Software

FalconStor Software, Inc. (NASDAQ: FALC) is the market leader in disk-based data protection. FalconStor delivers proven, comprehensive data protection solutions that facilitate the continuous availability of business-critical data with speed, integrity and simplicity. The Company’s TOTALLY Open™ technology solutions, built upon the award-winning IPStor® platform, include the industry leading Virtual Tape Library (VTL)with deduplication, Continuous Data Protector (CDP), File-interface Deduplication System (FDS), and Network Storage Server (NSS), each enabled with WAN-optimized replication for disaster recovery and remote office protection, and the HyperFS™ file system. FalconStor products are available as OEM or branded solutions from industry leaders, including Acer, Data Direct Networks, Dynamic Solutions International, EMC, Fujitsu, Hitachi Data Systems, Huawei, Pillar Data Systems, SGI, SeaChange and Spectra Logic and are deployed by thousands of customers worldwide, from small businesses to Fortune 1000 enterprises.

FalconStor is headquartered in Melville, N.Y., 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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FalconStor, FalconStor Software and IPStor are registered trademarks and TOTALLY Open and HyperFS are trademarks of FalconStor Software, Inc., in the U.S. and other countries. All other company and product names contained herein may be trademarks of their respective holders.

Links to websites or pages controlled by parties other than FalconStor are provided for the reader’s convenience and information only. FalconStor does not incorporate into this release the information found at those links nor does FalconStor represent or warrant that any information found at those links is complete or accurate. Use of information obtained by following these links is at the reader’s own risk.

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