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FalconStor Software Announces Q3 Quarterly Results Reports Continued Profitability and Positive Cash Flow; Teams with Additional Tier-1 OEM to Deliver Integrated VTL Solution

MELVILLE, N.Y., October 27, 2005—FalconStor Software, Inc. (Nasdaq: FALC), a leading developer of network storage software solutions, today announced financial results for its third quarter ended September 30, 2005. The Company also announced that another major U.S.-based high-tech company with worldwide distribution and service capabilities signed an OEM agreement to begin selling a private-labeled version of FalconStor´s VirtualTape Library.

Revenues for the third quarter of 2005 increased 35% to $10.1 million, compared with $7.5 million for the same period a year ago. Net income for the quarter was $0.5 million, or $0.01 per share, compared with a net loss of $2.3 million, or $0.05 per share, for the same period a year ago. Operating expenses in the third quarter of 2004 included a litigation settlement charge of $1.3 million and legal fees of $0.4 million, each associated with patent infringement litigation that was resolved in the third quarter of 2004.

For the nine months ended September 30, 2005, revenues increased 45% to $27.9 million, compared with $19.2 million for the same period a year ago. Net income for the nine month period was $0.6 million, or $0.01 per share compared with a net loss of $6.2 million, or $0.13 per share in the corresponding period a year ago. Operating expenses for the first nine months of 2004 included a litigation settlement charge of $1.3 million and legal fees of $1.0 million.

For the third quarter of 2005, revenues increased 6% from $9.5 million in the second quarter of 2005 to $10.1 million in the third quarter of 2005. Net income for the quarter was $0.5 million compared with net income of $0.3 million in the previous quarter.

The Company closed the quarter with $35.2 million in cash, cash equivalents and marketable securities, a $0.9 million increase from the previous quarter. Deferred revenue at September 30, 2005, increased to $7.6 million, or 10%, compared with the balance at June 30, 2005, and by 80% compared with the same period a year ago. Gross margins for the third quarter of 2005 increased to 82% compared with 80% for the same period a year ago and were consistent with the previous quarter.

“We are pleased that our VirtualTape Library (VTL) software is enabling another Tier-1 OEM to enter the disk-based backup market with a compelling solution,” said FalconStor Chairman and CEO ReiJane Huai. “The selection of our VTL software to power the OEM´s network storage solution is another endorsement of FalconStor´s technology as best in the industry and further evidence of the expected growth of this market segment.”

Third Quarter Highlights:
FalconStor continues to advance its product portfolio with new features, while expanding efforts to make its network storage solutions compatible with current and cutting edge technology.

  • FalconStor introduced an AES-based encryption service for its VirtualTape Library solution. The Secure Tape Option allows VTL customers to export data to physical tapes with on-the-fly encryption to guard against unauthorized access or misplacement while in transit to another location.
     
  • The company extended its support for enhanced backup and recovery, business continuity and disaster recovery to additional platforms. This includes VTL availability for the first time on the Sun Solaris 10 operating system, based on 64-bit extension technology, as well as expanded support of IPStor Enterprise EditionÃ’ for the soon to be released Microsoft SQL Server 2005.
     
  • FalconStor´s IPStor Enterprise Edition software completed validation testing with Oracle Database environments under the Oracle Storage Compatibility Program (OSCP). IPStor software and the company´s VTL solution were also certified with the Dot Hill SANnet II line of storage systems. VTL certification was completed with VERITAS NetBackup software, now from Symantec, on the Sun Solaris, IBM AIX, Red Hat Linux, HP-UX and Windows platforms.
     
  • FalconStor further expanded and cultivated relationships with solutions integrators worldwide, including partnering with Bell Microproducts, Inc., a leading value-added provider of storage products and solutions, to deliver turnkey VTL and iSCSI Storage Server backup and recovery appliances for the small and medium business (SMB) market.
     

The company will host a conference call on Thursday, October 27 at 4:30 PM ET to discuss the results. To participate in the call, dial 1-800-240-7305 in the United States or 303-262-2194 outside the United States. To view the synchronized slide presentation during the call, visit: https://falconstor.webex.com/falconstor/j.php?ED=87684432&UID=37320232.
Meeting Name: FalconStor Q3 2005 Earnings
Meeting password: ipstor
Meeting number: 481 989 093
To listen to a replay of the call beginning October 27 at 6:30 PM ET, dial 1-800-405-2236 in the United States or 303-590-3000 outside the United States, passcode 11042422#, or visit www.falconstor.com/company/investor-relations.

About FalconStor
FalconStor Software, Inc. (Nasdaq: FALC) is a leading developer of innovative network storage software that optimizes the protection and availability of enterprise and SMB data and applications, ensuring nonstop business productivity while simplifying storage and backup management to reduce operational costs. FalconStor´s award-winning solutions—IPStor® Enterprise Edition, VirtualTape Library, and iSCSI Storage Server—are available from major OEMs, system integrators, and resellers, and 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, NY, with offices throughout Europe and the Asia Pacific regions including Paris, Tokyo and Taiwan. FalconStor is an active member of the Technical Support Alliance Network (TSANet), Storage Networking Industry Association (SNIA) and Fibre Channel Industry Association (FCIA). For more information, visit www.falconstor.com or call 1-866-NOW-FALC (866-669-3252).

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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FalconStor and IPStor are trademarks or registered trademarks of FalconStor Software, Inc. All other company and product names contained herein may be trademarks of the respective holders.




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