FalconStor: Fiscal 4Q07 Financial Results

FalconStor Software, Inc. announced
financial results for its fourth quarter and full year ended December
31, 2007.

Revenues for the fourth quarter of 2007 increased 23% to $24.8 million,
compared with $20.2 million for the same period a year ago. GAAP income
from operations for the quarter increased 114% to $5.4 million,
compared with $2.5 million in Q4 2006. GAAP net income for the quarter
was $5.7 million, or $0.10 per diluted share, compared with $2.8
million, or $0.06 per diluted share in Q4 2006. Stock-based
compensation expense was $1.7 million in Q4 2007 and $2.3 million in Q4
2006.

Pro forma income from operations, which excludes stock-based
compensation expense, increased to $7.1 million in the fourth quarter
of 2007, compared with pro forma income from operations of $4.8 million
in the fourth quarter of 2006. Pro forma operating margins increased to
29% in the fourth quarter of 2007, compared with pro forma operating
margins of 24% in the same period a year ago. Pro forma net income
increased to $7.4 million, or $.14 per diluted share, in Q4 2007
compared with $5.1 million, or $.10 per diluted share, in Q4 2006.

For the year ended December 31, 2007, revenues increased 41%
to $77.4 million, compared with $55.1 million for the same period a
year ago. GAAP income from operations for 2007 increased to $6.1
million, compared with a loss from operations of $4.7 million in 2006.
GAAP net income for the year was $12.7 million, or $0.24 per diluted
share, compared with a net loss of $3.4 million, or $0.07 per diluted
share, in the same period a year ago. Stock-based compensation expense
was $7.9 million in 2007 and $9.4 million in 2006.

Pro forma income from operations for the full year 2007 increased 200%
to $14.0 million, compared with pro forma income from operations of
$4.7 million in 2006. Pro forma operating margins increased to 18% in
2007, compared with pro forma operating margins of 9% in the same
period a year ago. Pro forma net income increased to $16.2 million, or
$.30 per diluted share, in 2007 compared with $6.0 million, or $.12 per
diluted share, in 2006. Pro forma results for the full year exclude
stock-based compensation for 2006 and 2007 and a $4.5 million income
tax benefit recorded in Q3 2007.

The Company closed the year with $62.9 million in cash, cash
equivalents and marketable securities, as compared with $41.0 million
as of the end of 2006. Deferred revenue at December 31, 2007 was $19.0
million.

The Company also announced that its Board of Directors
approved an increase in the size of its Stock Repurchase Program, which
increases the number of shares that may be repurchased from 2 million
to 5 million shares. The Company has previously repurchased 1.2 million
shares leaving an additional 3.8 million shares available to be
repurchased. The repurchases may be made from time to time in open
market transactions in such amounts as determined at the discretion of
the Company´s management. The terms of the stock repurchases will be
determined by management based on market conditions.

For the year ended December 31, 2008, the Company currently anticipates:

• Revenues to be in the range of $100 million to $104 million
• Pro forma operating margins, which exclude stock-based compensation, to be in the range of 24% to 26%, up from 18% in 2007.
• Pro forma net income, which excludes stock-based compensation, to be between $0.31 and $0.36 per diluted share.
• The pro forma effective tax rate is expected to be approximately
  35% – 38%, which excludes the impact of stock-based compensation
  charges. Weighted average diluted shares are expected to be
  approximately 54 to 55 million shares.

“Our 2007 results demonstrate a solid foundation for scalable top and
bottom line growth with continuing optimization of operating
efficiency," said ReiJane Huai, Chairman and CEO of FalconStor. “We are
looking forward to delivering another year of quality growth by
leveraging FalconStor’s award-winning technology, strong end user
references, strategic OEM partnerships, market recognition, financial
strength and, most importantly, the 400+ motivated and committed
employees at FalconStor.”

FalconStor Software, Inc.