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FalconStor Software Announces Q2 Quarterly Results Revenues Increase 40% from Prior Year

MELVILLE, N.Y., July 26, 2007—FalconStor Software, Inc. (NASDAQ: FALC), the market leader in disk-based data protection solutions, today announced financial results for its second quarter ended June 30, 2007.

Revenues for the second quarter of 2007 increased 40% to $17.8 million, compared with $12.7 million for the same period a year ago. Net income for the quarter was $1.4 million, or $0.03 per diluted share, which includes $1.9 million in expenses related to stock-based compensation, compared with a net loss of $1.3 million, or $0.03 per diluted share, in Q2 2006, which included $2.4 million in expenses related to stock-based compensation. Pro forma net income, which excludes stock-based compensation expense, was $3.3 million or $0.06 per diluted share in the second quarter 2007, compared with pro forma net income of $1.1 million or $0.02 per diluted share for the second quarter of 2006.

For the six months ended June 30, 2007, revenues increased 56% to $34.1 million, compared with $21.9 million for the same period a year ago. Net income for the six-month period was $0.8 million, or $0.02 per diluted share, which includes $4.1 million in stock-based compensation expense, compared with a net loss of $4.9 million, or $0.10 per diluted share, in the same period a year ago which included $4.7 million in stock-based compensation expense. Pro forma net income, which excludes stock-based compensation expense, was $5.0 million, or $0.10 per diluted share, compared with a loss of $0.3 million, or $0.01 per diluted share, in 2006.

Compared with the previous quarter, revenues increased 9% from $16.3 million in the first quarter to $17.8 million in the second quarter. Net income for the second quarter was $1.4 million, or $0.03 per diluted share, which includes $1.9 million in expenses related to stockbased compensation, compared with a net loss of $0.6 million, or $0.01 per share, in the first quarter, which included $2.2 million in expenses related to stock-based compensation. Excluding stock-based compensation, pro forma net income increased to $3.3 million, or $0.06 per diluted share, in the second quarter compared with a pro forma net income of $1.6 million, or $0.03 per diluted share, in the first quarter.

The Company closed the quarter with $56.2 million in cash, cash equivalents and marketable securities, which is an increase of $3.9 million compared with the previous quarter. Deferred revenue at June 30, 2007, increased to $18.1 million, or by 63% compared with the same period a year ago.

“We are pleased with the continuing expansion in revenue, strategic partnerships and our product portfolio,” said ReiJane Huai, Chairman and CEO of FalconStor. “In addition to powering the fastest, biggest and smartest VTL in the enterprise space, we will be releasing a series of purpose-built, competitively positioned data protection solutions targeting mid-range customers to broaden our channel distribution, expand our market coverage and further our business momentum.”

The company will host a conference call on Thursday, July 26th at 4:30 p.m. EDT, to discuss the results. To participate in the conference call, please dial:

Toll Free: 1 800-240-8658
International: 1 303-262-2130

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=100393732&UID=0
Meeting: FalconStor Q2 2007 Earnings
Meeting password: q2numbers
Meeting Number: 486 738 639

A conference call replay is scheduled to be available beginning 7/26 at 6:30 PM EDT through 11:59 PM EDT on 7/31. To listen to the replay of the call, dial toll free: 1 800-405-2236 or International: 1 303-590-3000, passcode: 11093411#, 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 recovery of business-critical data with speed, integrity, and simplicity. Our technology-independent solutions, built upon the award-winning IPStor® virtualization platform, include the industryleading 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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