February 08, 2006
FalconStor Software Announces Q4 and Full Year Financial Results; Achieves Profitability and Positive Cash Flows on Full Year Basis; Revenues Increase 43% Year over Year

MELVILLE, N.Y.--(BUSINESS WIRE)--Feb. 8, 2006--FalconStor Software, Inc. (Nasdaq: FALC), a leading provider of adaptive data protection solutions, today announced financial results for its fourth quarter and fiscal year ended December 31, 2005.

Revenues for the quarter increased 37% to $13 million, compared with $9.5 million for the same period a year ago. Net income for the fourth quarter of 2005 was $1.7 million, or $0.03 per share, compared with net income for the fourth quarter of 2004 of $0.3 million, or $0.01 per share.

The Company reached profitability on a full year basis for the first time in 2005. For the twelve months ended December 31, 2005, revenues increased 43% to $41 million compared with $28.7 million for the year ended December 31, 2004. Net income for 2005 was $2.3 million, or $0.05 per share, compared with a net loss for 2004 of $5.9 million or $0.13 per share. 2004 results included a litigation settlement charge of $1.3 million and legal fees of $1.0 million, each associated with patent infringement litigation that was resolved in 2004.

Revenues for the fourth quarter of 2005 increased 29% compared with the previous quarter, from $10.1 million to $13 million. Net income for the fourth quarter of 2005 was $1.7 million, or $0.03 per share, compared with net income for the third quarter of 2005 of $0.5 million, or $0.01 per share.

The Company closed the quarter with $36.6 million in cash, cash equivalents and marketable securities, a $1.5 million increase from the previous quarter. Deferred revenue at December 31, 2005, increased to $9.6 million, or 27%, compared with the previous quarter, and by 79% compared with the same period a year ago.

"The financial performance of 2005 underscores the strong market acceptance of our leading-edge technology and the scalability of our business model," said FalconStor Chairman and CEO ReiJane Huai. "We are charging ahead with an expanded product portfolio, key partnerships, a focused sales/distribution channel, and strategic marketing/PR initiatives. Our dedicated staff is committed to making 2006 a banner year for FalconStor."

Company Highlights

2005 proved to be another year of outstanding growth and achievements for FalconStor.

Deloitte's prestigious Technology Fast 50 List recognized FalconStor as one of the 50 fastest growing technology companies in the area, based on percentage revenue growth over five years from 2000-2004.

For outstanding achievement in technology innovation, VARBusiness magazine named FalconStor's IPStor(R) Enterprise Edition software a winner in the storage category of the VARBusiness Tech Innovator awards competition and included FalconStor's iSCSI Storage Server in its Top 100 Mid-market Solutions.

During 2005, FalconStor continued to enhance the core capabilities of its IPStor and VirtualTape Library (VTL) software. This includes a version of IPStor optimized to run on System-On-Chip ("SOC") platforms, such as Intel Corporation's XScale I/O Processor.

FalconStor has established a new OEM partnership with a leading computer, networking and communications products manufacturer to offer an entry-level data storage and protection appliance, powered by IPStor/SOC, targeting the Small & Medium Business/Small Home Office ("SMB/SOHO") market. The launch is scheduled for the first quarter of 2006. The SOC-based storage appliance will enable SMB/SOHO users to perform local backup/recovery.

In the fourth quarter of 2005, FalconStor entered into a strategic OEM partnership with a major IP-networking solution provider headquartered in Hangzhou, China. Product launch, and an announcement detailing the scope of the collaboration between the two companies, is scheduled for the first quarter of 2006.

About FalconStor 

FalconStor Software, Inc. (Nasdaq: FALC) is a leading provider of adaptive data protection solutions. FalconStor's technology optimizes the backup and recovery of business critical data (DAS, NAS or SAN) within the data center to maximize business continuity. FalconStor's flagship products - IPStor(R) 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.

FalconStor, IPStor and PrimeVault are servicemarks 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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              FalconStor Software, Inc. and Subsidiaries
              CONDENSED CONSOLIDATED BALANCE SHEETS

                                           December 31,   December 31,
                                              2005           2004
                                           -------------  ------------

Assets
Current assets:
Cash and cash equivalents                  $18,796,973   $15,484,573
Marketable securities                       17,833,683    18,488,616
Accounts receivable, net                    15,187,408    10,269,822
Prepaid expenses and other current assets      911,715       629,036
                                           -------------  ------------

       Total current assets                  52,729,779    44,872,047
                                           -------------  ------------

Property and equipment, net                   5,277,609     4,662,269
Goodwill                                      3,512,796     3,512,796
Other intangible assets, net                    216,864       307,620
Other assets                                  2,236,725     2,719,460
                                           -------------  ------------

       Total assets                         $63,973,773   $56,074,192
                                           =============  ============

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable                           $ 1,152,228   $   821,433
Accrued expenses                             4,522,212     3,501,034
Deferred revenue                             7,401,018     4,097,279
                                           -------------  ------------

      Total current liabilities              13,075,458     8,419,746

Deferred revenue                              2,240,208     1,290,496
                                           -------------  ------------

       Total liabilities                     15,315,666     9,710,242
                                           -------------  ------------

Commitments
      Total stockholders' equity             48,658,107    46,363,950
                                           -------------  ------------

      Total liabilities and stockholders'
       equity                               $63,973,773   $56,074,192
                                           =============  ============

              FalconStor Software, Inc. and Subsidiaries
            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                          Three Months Ended         Year Ended
                             December 31,           December 31,
                          2005         2004      2005         2004
                              (unaudited)
Revenues
Software license 
 revenue                $9,604,441 $7,594,527 $29,544,467 $21,487,866
Maintenance revenue      2,300,326  1,245,490   7,593,804   4,442,724
Software services and
 other revenue           1,115,048    656,727   3,825,832   2,778,088
                        ---------- ---------- ----------- ------------
                        13,019,815  9,496,744  40,964,103  28,708,678

Operating expenses:
 Amortization of
  purchased and
  capitalized software     176,028    222,583     781,500   1,393,908
 Cost of maintenance,
  software services and
  other revenue          1,651,570  1,069,687   6,114,112   4,150,309
 Software development
  costs                  3,601,015  2,437,812  12,039,488   9,050,092
 Selling and marketing   4,810,557  4,030,020  16,109,440  14,277,167
 General and
  administrative         1,091,680  1,541,631   4,212,769   5,108,516
Litigation settlement            -          -           -   1,300,000
                        ---------- ---------- ----------- ------------
                        11,330,850  9,301,733  39,257,309  35,279,992
                        ---------- ---------- ----------- ------------
  Operating income 
   (loss)                1,688,965    195,011   1,706,794  (6,571,314)
                        ---------- ---------- ----------- ------------
Interest and other
 income                     36,350    160,489     705,063     714,412
                        ---------- ---------- ----------- ------------
  Income (loss) before
   income taxes          1,725,315    355,500   2,411,857  (5,856,902)
                        ---------- ---------- ----------- ------------
Provision for income
 taxes                      69,363     16,666     118,750      31,945
                        ---------- ---------- ----------- ------------

  Net income (loss)     $1,655,952 $  338,834 $ 2,293,107 $(5,888,847)
                        ========== ========== =========== ============


Basic net income (loss)
 per share              $     0.03 $     0.01 $      0.05 $     (0.13)
                        ========== ========== =========== ============

Diluted net income
 (loss) per share       $     0.03 $     0.01 $      0.05 $     (0.13)
                        ========== ========== =========== ============

Weighted average basic
 shares outstanding     47,802,694 47,307,612  47,662,446  46,967,422
                        ========== ========== =========== ============
Weighted average diluted
 shares outstanding     50,958,553 51,249,985  50,776,396  46,967,422
                        ========== ========== =========== ============