FalconStor Software Reports Fourth Quarter and Full Year Financial Results

FalconStor Software, Inc. (NASDAQ: FALC), the provider of TOTALLY Open^™ data protection solutions, today announced financial results for its fourth quarter and full year ended December 31, 2008.

Revenues for the fourth quarter of 2008 decreased 6% to $23.4 million, compared with $24.8 million for the same period a year ago. GAAP loss from operations for the quarter was $0.2 million, compared with operating income of $5.4 million in the fourth quarter of 2007. GAAP net income for the quarter was $0.6 million, or $0.01 per diluted share, compared with GAAP net income of $5.7 million, or $0.10 per diluted share, in the fourth quarter of 2007. Stock-based compensation expense was $2.5 million in the fourth quarter of 2008 and $1.7 million in the fourth quarter of 2007.

Non-GAAP income from operations was $2.3 million in the fourth quarter of 2008, compared with non-GAAP income from operations of $7.1 million in the fourth quarter of 2007. Non-GAAP net income was $2.0 million, or $0.04 per diluted share, in the fourth quarter of 2008, compared with $7.4 million, or $0.14 per diluted share, in the fourth quarter of 2007. Non-GAAP results exclude the effects of stock-based compensation expense net of the related income taxes.

Revenues in the fourth quarter increased 19% compared with the previous quarter. GAAP operating results improved from a loss of $1.4 million in the third quarter to a loss of $0.2 million in the fourth quarter. GAAP net income increased to $0.6 million compared with a net loss of $1.6 million in the previous quarter. Non-GAAP operating income in the fourth quarter increased to $2.3 million compared with $0.3 million in the third quarter. Non-GAAP net income increased to $2.0 million or $0.04 per diluted share compared with $0.4 million or $0.01 per diluted share in the previous quarter. Stock-based compensation expense was $1.6 million in the third quarter of 2008.

For the year ended December 31, 2008, revenues increased 12% to $87 million compared with $77.4 million for the prior year. GAAP income from operations for 2008 was $1.0 million compared with $6.1 million in 2007. GAAP net income was $1.2 million, or $0.02 per diluted share for the year ended December 31, 2008, compared with net income of $12.7 million, or $0.24 per diluted share, in the same period a year ago. In 2008, the Company recorded a GAAP tax provision of $1.5 million compared with a tax benefit of $4.3 million in the prior year period. Stock-based compensation expense was $9.1 million in 2008 and $7.9 million in 2007.

Non-GAAP income from operations was $10.1 million for the year ended December 31, 2008, compared with non-GAAP income from operations of $14.0 million for the same period in 2007. Non-GAAP net income in 2008 was $7.8 million, or $0.16 per diluted share, compared with $16.2 million, or $0.30 per diluted share in the same period a year ago. Non-GAAP results exclude the effects of stock-based compensation expense net of the related income taxes, and also exclude a $4.5 million income tax benefit recorded in 2007.

"The difficult economic environment hurt our results for 2008. But we still believe we are well positioned for long term success both financially, as demonstrated by our increase in cash flows from operations and with our product portfolio. To cope with the challenging economy and constrained budgets, corporate IT must deliver extraordinary management and operating efficiency – creating an ideal opportunity for FalconStor's TOTALLY Open Data Protection solutions," said ReiJane Huai, chairman and CEO of FalconStor Software. "Validated by elite Fortune 100 accounts and endorsed by strategic OEM partners, FalconStor solutions will continue to expand in key growth segments of the storage market - virtualization, CDP/replication, VTL, and file deduplication - by leveraging our unique product synergy and offering tangible business value that enriches customers' revenues and bottom line."

The Company closed the quarter with $42.8 million in cash, cash equivalents, and marketable securities. Cash flow from operations for the full year was $18.2 million compared with $16.6 million in 2007. Deferred revenue increased 16% from the prior period year and at December 31, 2008 was $22.1 million. During the fourth quarter of 2008, the Company repurchased 2.1 million shares at a total purchase price of $5.2 million, or an average price of $2.48 per share. During 2008, the Company repurchased a total of 5.6 million shares at a total price of $33.9 million or an average price of $6.01 per share.

The Company also announced that its Board of Directors approved another increase in the size of its Stock Repurchase Program of an additional six million shares. As a result of this increase, the Company may repurchase up to 7.2 million additional shares.

For the year ending December 31, 2009, the Company anticipates:

• Revenues to be in the range of $96 million to $100 million
• Non-GAAP net income to be between $0.18 and $0.21 per diluted share, which excludes stock-based compensation, net of income taxes.

The pro forma effective tax rate is expected to be approximately 33% - 36%, which excludes the impact of stock-based compensation charges. Weighted average diluted shares are expected to be approximately 47 to 48 million shares.

The Company will host a conference call on Thursday, February 5, 2009 at 4:30 p.m. ET, to discuss the results. To participate in the conference call, please dial:

Toll Free: 1-800-218-0204

International: 1-303-242-0001

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=117973087&RG=1&UID=999954867

Meeting: FalconStor Q4 2008 Earnings

Meeting password: q4numbers

Meeting Number: 487 693 322

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 Feb. 5 at 6:30 p.m. ET through 11:59 p.m. ET on Feb. 9. To listen to the replay of the call, dial toll free: 1-800-405-2236 or International: 1-303-590-3000, passcode: 11125532, 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 into the 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. 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), and Network Storage Server (NSS), enabled with WAN-optimized replication for disaster recovery and remote office protection. FalconStor products are available from major OEMs and solution providers including Acer, COPAN Systems, Data Direct Networks, DSI, EMC, H3C, IBM, Pillar Data Systems and Sun 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. For more information, visit www.falconstor.com or call 1-866-NOW-FALC (1-866-669-3252).

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.

FalconStor, FalconStor Software, and IPStor are registered trademarks, and TOTALLY Open is a trademark of FalconStor Software, Inc. in the US and other countries. All other company and product names contained herein may be trademarks of their respective holders.

(2) Represents the effects of non-cash stock option expense recognized for GAAP purposes under FAS 123R for the three and twelve months ended December 31, 2008 and 2007, net of related income tax effects. For the three months ended December 31, 2007, the related income tax effects were not materially different for both GAAP and non-GAAP purposes.