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FalconStor Software Announces Q3 Quarterly Results Revenues Increase 29% from Prior Year

MELVILLE, N.Y., October 26, 2006—FalconStor Software, Inc. (NASDAQ: FALC), the leading developer of data protection solutions, today announced financial results for its third quarter ended September 30, 2006.

Revenues for the third quarter of 2006 increased 29% to $13 million, compared with $10.1 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 stock options. Pro forma net income for the third quarter of 2006, excluding stock option expense, was $1.2 million or $0.02 per share, compared with net income of $0.5 million or $0.01 per share for the third quarter of 2005.

For the nine months ended September 30, 2006, revenues increased 25% to $34.8 million, compared with $27.9 million for the same period a year ago. Net loss for the nine month period was $6.2 million or $0.13 per share, which includes $7.1 million in expenses related to stock options. Pro forma net income for the nine month period, excluding stock option expense, was $0.9 million or $0.02 per share, compared with net income of $0.6 million and $0.01 per share for the same period a year ago.

Compared with the previous quarter, revenues increased from $12.7 million in the second quarter of 2006 to $13 million in the third quarter of 2006. Net loss for the third quarter was $1.3 million or $0.03 per share, which includes $2.4 million in expenses related to stock options, compared with a net loss of $1.3 million or $0.03 per share in the second quarter, which includes $2.4 million in expenses related to stock options. Excluding stock option expenses, pro forma net income increased to $1.2 million or $0.02 per share in the third quarter of 2006 compared with a pro forma net income of $1.1 million or $0.02 per share in the second quarter of 2006.

The Company closed the quarter with $39 million in cash, cash equivalents and marketable securities and recorded its eighth consecutive quarter of positive cash flows from operations. During the third quarter of 2006, the Company repurchased 70,000 shares of Common Stock for a total cost of $0.5 million. Deferred revenue at September 30, 2006, increased to $12 million, or by 8%, compared with the previous quarter, and by 58% compared with the same period a year ago.

"We are pleased with the strong progressive results for this quarter. It is clear our teaming with leading industry storage companies to advance the market acceptance and technical excellence of Virtual Tape Library (VTL) solutions is successful," said ReiJane Huai, Chairman and CEO of FalconStor. "Our world-wide leadership position in data protection solutions will enable FalconStor business partners to sell the vision of a complete family of disk-based data protection solutions. This will accelerate our revenue growth and bolster our presence in the network storage industry."

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

Toll Free: 800-240-8621
International: 303-262-2194
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=93586157&RG=1

Meeting: FalconStor Q3 2006 Earnings
Meeting password: q3numbers
Meeting Number: 483 077 652

A conference call replay will be available beginning 10/26 at 6:30 PM EDT through 11:59 PM EDT on 10/30. To listen to the replay of the call, dial toll free: 800-405-2236 or International: 303-590-3000, passcode: 11073710#, or visit our website at www.falconstor.com/en/company/?pg=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 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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