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Executives

ReiJane Huai, Chief Executive Officer

Bernie Wu, Vice President of Business Development

James Weber, Chief Financial Officer

Analysts

Brian Freed – Morgan, Keegan

Mark Kelleher – Canaccord Adams

Adele Mao – Susquehanna International Group

Rajesh Ghai – Thinkequity

Gabriel Lowy – Noble Research

FalconStor Software Inc. (FALC) Q4 2008 Earnings Call February 5, 2009 8:45 AM ET

Operator

Good afternoon and thank you for joining us to discuss FalconStor Software’s Q4 and Full Year 2008 Earnings. ReiJane Huai, FalconStor's Chief Executive Officer, Bernie Wu, FalconStor's Vice President of Business Development, and Jim Weber, FalconStor's Chief Financial Officer, will discuss the Company's results and activities and we’ll then open the call for your questions. The Company would like to advise all participants that today's discussion may contain what some consider forward-looking statements.

These forward-looking statements 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 data protection and storage, and networking industries; competition in the data protection and 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.

During today's call, there will be discussions that include non-GAAP results. A reconciliation of non-GAAP results to GAAP has been posted on FalconStor’s website at www.falconstor.com, once again that’s www.falconstor.com under investor relations.

After the close of business today, FalconStor released its Q4 and full year 2008 earnings. Copies of the earnings release and supplemental financial information are available on FalconStor's website at www.falconstor.com.

I am now pleased to turn the conference over to Mr. ReiJane Huai, Chairman and CEO of FalconStor Software, Incorporated. Please go ahead sir.

Reijane Huai,

Thank you. Good afternoon. Thank you for joining us for FalconStor's fiscal 2008 Q4 and full year earnings conference call.

I will outline our 2008 business strategies it with a lot of the opportunity presented to us, but the current challenging economy conditions. Bernie will report on the status of our strategic partnership that we face at the beginning of the new fiscal year, and Jim will comment on our end of the year financial results.

In general, we are pleased with our execution in Q4 under the constraints of the deepening worldwide recession and we are confident about our ability to successfully market our integrated suite of totally open data protection solutions even in the down economies throughout 2009.

Revenues for the fourth quarter increased 19% over Q3 and revenues for the year increased 12% over the prior year. As we need to – as we ended 2008 at $87 million. Meeting the high end of our revised guidance for the year. I would like to take a moment to reiterate our confidence in FalconStor’s business fundamentals.

2009 promised to be a tough competitive year for our industry. Because of favorite budget constraints CIOs and IT managers are looking for innovative softwares to drive as much value as they can all of the existing data center infrastructure without incurring additional capital expenditures.

However, the current IT landscape is littered with desperate FILOS of storage devices and services. They are making it very difficult to get operational leverage across vendor of solution barriers.

Implementation of business continuity services such as tape backup, continuous data protection, and replication is extremely complicated. Due to the enterprise architecture and the lack of indication, proactively transition from dependent on single vendor’s proprietary solutions to an open paradigm is the only way for IT to realize maximum return on assets and operating efficiency.

Embracing the open platform or storage services such as FalconStor’s TOTALLY Open data protection. It should be the best status for corporate IT to improve operating efficiency, enhanced productivity, and again a comprehensive advantage for the business.

Due to power IT store our proven storage virtualization and service platform FalconStor’s TOTALLY Open data to protection is an integrated set of storage services that maximize IT’s return on returned on existing assets and maximize operational efficiency quickly describe its solutions contribution to IT as well as the cross border synergy.

FalconStor NSS, a Network Storage Servers, comprising unified management of disk rays from individual storage vendors. Besides provision with this capacity to the application holds in real time and demand with consistency and experience. NSS also for building local or remote recovery capabilities. Backed by a service level agreement at as the major competitor differentiator. Our iSCSI market share in China so promising with H3C is over 51% and we will be launching our prudent cost effective turnkey iSCSI solutions in North America in 2009.

In addition, FalconStor’s NSS is the first and only virtualization software solution that passed Vmware’s SVD certification. Demonstrating our technology leadership as Fujitsu’s partnership was important player in the industry.

FalconStor VirtualTape Library VTL with embedded data duplication. Enables IT to improve the performance reliability, and scalability of third-party tape backup and to centralize the illustration of physical tape back devices through virtualization. VTL is OEM or EMC IBM and SAN and validated by many Fortune 100 accounts in the mission-critical environment. Our VTLs performance scalability and the high availability allows IT to enjoy its benefits without worrying about service interruption. We expect VTL to continue to contribute our business growth in 2009.

While VTL improves the quality of tape backup from the device standpoint, FalconStor’s Continuous Data Protector CDP, raise the defenders with data protection to the next level with regards to risk window recovery type, scope of protection, and scale.

FalconStor's CDP was developed based on our knowledge of tape backup. Besides addressing the architecture flows, real virtualization in the advance networking. We have also integrated state-of-the-art replication capability to allow data protection services to scale through remote offices, data centers to the divestment coverage rights in the homogenous fashion. CDP’s ability to accelerate the tape backup performance by 400%, matching the best companion product for our VTL.

We are ready to release FalconStor’s fault to deduplication server a LAN-based data deduplication service this quarter to further expand our presence in the data deduplication market. Our customers will be able to enjoy the flexibility to efficiently store or backup the business-critical data through either a LAN-based file interface or a SAN-based VTL paradigm.

Within the individual immediate business duplication and interproduct synergy will be the major driver behind the demand for our TOTALLY Open data protection in 2009.

We are fully aware of the slow economy and are confident of or solution’s proven capability to how IT managers effectively overcome the operational challenges. Therefore, we’ll continue to expand our worldwide field sales support and marketing organization as a vital component to the success of FalconStor in the years to come.

Our rich product portfolio and quality of support service, will enable our channel partners to quickly deploy integrated solutions within customers existing infrastructure in a similar fashion. And start realizing tangible book value on day one.

If I turning on solutions to be able to traditional OEM and retailer channel, FalconStor also offer remote accessories, investment recovery service as storage as a service fast. In conjunction with strategic partners under our prime brand.

That’s for our market position. We will employ an educational approach to promote and cultivate FalconStor’s image at corporate IT trusted advisor will introduce open innovative solutions to maximize the return and operating efficiency of their existing infrastructure.

With well positioned products focusing real business needs in the current economy, strategical industrial partnerships, voice file recognition, incredible enterprise customers, a growing distribution and reseller channel and a solid balance sheet as offsetting that, we believe in our ongoing ability to expand our worldwide business to generate significant long-term shareholder value. And now I would like to ask Bernie Wu, our Vice President of Business Development to review our strategic partnerships and industry relationships.

Bernie Wu

Great. I’d now like to provide an update for you on our strategic partners, alliances, and business initiatives. We’re pleased to see our VTL OEM business rebounded in Q4 starting with EMC. If you recall, we had some decline in business with them during the second and third quarters last year related to their customers holding back purchases for the pending release of a preannounced new version of the Enterprise Class DL 4000 series. Q4 was the first full quarter of shipments of that new version.

Q4 was also Sun’s first full quarter of shipping us their latest VTLs pulling our deduplication and we saw continued year-over-year growth of about 20%.

Our Tier II retail partners also contributed to the rebound, in particular Spectra Logic and Dyamic Solutions Incorporated. On the CDP replication front, we are starting to see good results from our reseller efforts with Sun and Pillar, as well as our meeting the channel efforts with HP and IBM. For example, we recently successfully completed a large proof-of-concept effort involving our replication spending two continents with a major global system integrator.

On the NSS front, we were pleased to have Microsoft designate us as one of the virtualization partners for Hyper-V. We’re also starting to see more and more Vmware related DR Disaster Recovery wins as a result of our alliance and increased channel sales efforts.

I would now like to give you some insight on our plans in 2009 to continue to ramp up of our business. We are continuing to see more adoption of de-dup in the enterprise area and will be raising up both our VTL and file interface based de-dup areas.

We believe our offerings are now mature, scalable, and very competitive. For example, one of our largest customer – largest customers have now deployed over 80 de-duplication nodes across its data centers and up to 4 plus 1 cluster configurations. We also continue to leverage our software and storage industry alliances and buildup our channel efforts for CDP and NSS products. We are also starting to see interest from other Tier 1s in partnering with us in this fashion.

In order to diversify our channels and address new business models that are more appropriate for the current economic conditions, we are also focusing and are recruiting and ramping up two additional classes of partners. First, online back up and DR service providers. As a result of the economic pressures to outsource and cut cost, we are seeing more activity in this area and are currently in the midst of several qualification and ramp up efforts. We expect to have several service - new service provider partners in production by year end.

Second, Global System Integrators. We are starting to see interest and sales activity from this class of partners and we will be especially focusing on the public sector as spending in that area of will remain strong.

In summary, we remained cautiously optimistic about 2009 and our strong value proposition during this – during a heavy cost cutting and we are particularly excited about expanding and deepening our partnerships and channels in anticipation of a general economic rebound. I’d now like to introduce Jim Weber, who will review the company’s financials.

James Weber

Thank you very much Bernie, and welcome everyone to our earnings call. I’d like to start off by saying that we are pleased that we exceeded the revised earnings target that we gave on our previous call. Our revised guidance was full year revenue in the range of $85 million to $87 million and non-GAAP net income between $0.12 and $0.14 per diluted share.

Our actual results came in with full year revenues at the high end of our range of $87 million, and non-GAAP net income was higher than our guidance and came in at $0.16 per share. For the fourth quarter 2008, revenues declined 6% to $23.4 million, compared with $24.8 million for the same period a year ago. The non-GAAP income from operations was $2.3 million, compared with $7.1 million in Q4, 2007. And non-GAAP net income was $2 million or $0.04 per diluted share in Q4, 2008, compared with $7.4 million or $0.14 per diluted share in Q4, 2007.

Non-GAAP operating margins were 10% for the fourth quarter of 2008, compared with 29% in 2007 and non-GAAP gross margins for the quarter were 87% in 2008, compared with 89% in 2007. The non-GAAP numbers excludes stock-based compensation of $2.5 million in the fourth quarter of 2008, and $1.7 million in Q4 of 2007.

Even though our revenue growth slowed down in 2008 as a result of the macroeconomic environment, we continued to hire and invest for the long-term growth of the company. As a result of our continued investment, whereby we increased our headcount from 414 to 505 employees. Our margins and profits were lower than the prior year.

Even though on these tough economic times, where we know the revenue growth is slow, we will continue to invest in our future. Although, these investments records our operating profits and margins to be lower than we would like, we believe that we should to continue to invest to make sure we are properly positioned for long-term growth.

Compared with the previous quarter, revenues increased 19% from $19.6 million to $23.4 million, and non-GAAP income from operations increased from 300,000 in Q3 to $2.3 million in Q4, and non-GAAP net income increased from $400,000 or $0.01 per share in Q3 to $2 million or $0.04 per share in Q4. The non-GAAP numbers excludes stock-based compensation of $2.5 million in the fourth quarter of 2008, and $1.6 million in Q3 2008.

On a full year basis, revenues increased 12% from $77.4 million to $87 million. Non-GAAP income from operations were $10.1 million in 2008, compared with $14 million in 2007 and non-GAAP net income was $7.8 million or $0.16 per diluted share for 2008, compared with $16.2 million or $0.30 per diluted share in 2007.

Non-GAAP operating margin were 12% in 2008, compared with 18% in 2007, and non-GAAP gross margins for 2008 were 86% compared with 87% in 2007. The non-GAAP numbers for the full year excludes stock-based compensation of $9.1 million in 2008, and $7.9 million in 2007 and also excludes the tax benefit of $4.5 million that was recorded in 2007.

On a GAAP basis, our loss from operations for the fourth quarter was $200,000 compared with operating income of $5.4 million in the prior year and GAAP net income was 600,000 or $0.01 per share for the fourth quarter, compared with GAAP net income of $5.7 or $0.10 per share in the prior year. For the full year of 2008 our GAAP income from operations was $1 million compared with $6.1 million in 2007 and GAAP net income was $1.2 million or $0.02 per share compared with $12.7 or $0.24 per share in 2007. And the 2007 GAAP net income results included tax benefit of $4.3 million compared to a tax expense of $1.5 million in 2008 as of the end of the year our cash, cash equivalents and marketable securities balance was $42.8 million. Our cash flow from operations for the full year increased to $18.2 million compared with $16.6 million in 2007. Our deferred revenue balance was $22.1 million, which is an increase of 16% compare to the prior year.

During the fourth quarter of 2008, we’ve repurchased $2.1 million shares at a total purchase price of $5.2 million or an average price $2.48. During the full year 2008, we repurchased a total of $5.6 million at a total price of $33.9 million or an average price of $6.01 per share. We are very pleased that we are able to retire over 10% of our total shares outstanding during the year.

We also announced today that we increased our stock repurchase program by an additional $6 million shares, we now have $7.2 million shares available to be repurchased. For the strong current cash balance no debt and strong positive cash flow from operations, we believe that use in our cash to buyback shares of these levels is the best use of our cash at this time.

Although the economy as course to slowdown on revenue we are still pleased with our financial position and confident about our products ability to continue to gain market share. Even though in these difficult times our revenues grew on a year-over-year basis. We finish the year with respectable operating margin at 12%. We generated over $18 million in cash flows from operations during the year.

We also believe that IT managers will be proactively seeking software solutions to maximize the operating efficiency of their existing infrastructure and produce immediate cost savings. Validated by major Fortune 100 accounts around the world for expecting our totally open data protecting solutions to assist corporate IT to optimize the utilization of IT assets and contributed to the bottom line growth.

For 2009 has been our practice in the past we are going to give guidance on a full year basis only. We view our business on a full year basis and not a quarterly basis. Each year we typically experience seasonality with Q1 being the weakest quarter and Q4 being the strongest, we expect this trend to continue in 2009. We are projecting 2000 revenue to be in the range of $96 million to $100 million and we expect non-GAAP EPS to be in the range of $0.18 to $021 per share. The non-GAAP EPS numbers exclude the effect of stock option expenses net of taxes.

We estimate that our non-GAAP effective tax rate second tax rate will be between 33 and 36%. And we also expect our weighted average diluted shares to be approximately $47 to $48 million shares. We are pleased with our results this quarter and we are very excited about the prospects for 2009. And now at this point I will be happy to take your questions. Operator?

Question & Answer Session

Operator

Thank you sir. (Operator Instructions) Our first question comes from the line of Brian Freed with Morgan, Keegan. Please go ahead.

Brian Freed – Morgan, Keegan

Thank you a couple quick questions first with respect to guidance a lot of companies are training from guidance all together, other companies are going to one quarter, how do you feeling about your level of visibility in terms of forecast from early end pipeline with respect to the guidance you gave?

Unidentified Company Representative

Brain what we did for 2009 is exactly we did at the end of Q3 what we did as look that all the different territories we are looked for trends there we spoke to our partners our channel partners, our OEM partners, definitely took into consideration in the economy and based on that, we came with numbers, that we feel we are comfortable with somewhat so what we did in Q3 and we are fortunate that our Q4 numbers came in at the high end of the guidance. So, I think, based on the steps we took we feel pretty comfort within numbers that we given on a full year basis.

Brian Freed – Morgan, Keegan

Okay, and then secondly with respect to linearity in trend both in the December quarter and quarter today. Can you talk a little about what you saw in December and also what January looks like thus far?

Bernie Wu

You know I think as far as, Q1 I think we are going to see typical seasonality, Q4 this year, we did see a rebound from EMC, which EMC always as a strongest quarter on Q4 we did see some good growth in China are in Q4 we always see strength there. So, that was fairly typical and so we are pleased with there away Q4 came in, and then Q1 like I said, we are seeing typical seasonality I think the pipeline are pretty good and pretty strong from our channel partners, and I think you all see the typical trends that you see that we have seen prior as far as the way our revenues fall out on a quarterly basis

Brian Freed – Morgan, Keegan

Okay, great. And then just a couple of housekeeping item. One can you give us a few metric on how de-duplication did for you either, across the growth et cetera and two can you give us some percentages of your major customers for the quarter.

Bernie Wu

I will start up by talking about the major customers your EMC on a full year basis was 20% of our revenue and on Q4 there were 21% Sun did well on a full year basis, there are 13% of our revenue in Q4 there were 15% and Huawei-3Com in the quarter was a 10% customers.

Brian Freed – Morgan, Keegan

Right

Bernie Wu

You know as far as our products, I think we continue to see the acceptance of our de-dup products as a recall we particularly bundle our de-dup with our VTL. So, we are seeing growth there the combined price of VTL and de-dup is, over 50% of our revenue. So, I think we are seeing pretty good acceptance on that front.

Brian Freed – Morgan, Keegan

Great, thank you.

Operator

Thank you sir. Our next question comes from the line of Mark Kelleher with Canaccord Adams. Please go ahead.

Mark Kelleher – Canaccord Adams

Thanks. Could you guys maybe give out Jim maybe break out the percent of revenue that came from OEM versus what came from distribution?

James Weber

Yeah, in Q4 the OEM business was 54% and then business from our channel was 46%

Mark Kelleher – Canaccord Adams

Okay.

James Weber

And on a full year basis the OEMs are 45% the channel is 55%.

Mark Kelleher – Canaccord Adams

Okay, as you expand your channel operation is that imposing a margin decrease that is kind of permanent going forward as you spend more on sales and marketing.

James Weber

No, I don’t think you know…

Mark Kelleher – Canaccord Adams

Let me put in another way, where do you think the operating margins can get to.

James Weber

Well, this year, we didn’t tough economic so I think, operating margins were expecting to be up a little bit from last year. Last year we finish at 12% so we’re probably thinking 13 or 14%, for ’09 based on the tough economy. But, if things rebound, we think we get back to where we were, we were at 18% in ’07 we think we get above that and eventually go towards our target operating margins at 30%.

Mark Kelleher – Canaccord Adams

Okay. And how about the de-duplication competition out there are you who are you seeing as a EMC.

Reijane Huai

We will continue to compete with not just a EMC but also other players in the state of de-duplication market, but its also in the place adoption we are very, very comfortable of all the performances in the scalability, availability of our BPO with de-dup. And now we based on the can we feel what a close in the past also based on the permanent yields that we have in our pipeline.

Mark Kelleher – Canaccord Adams

Okay, great thanks.

James Weber

Thanks Mark.

Reijane Huai

Thank you.

Operator

Thank you sir. Our next question comes from the line of Adele Mao with Susquehanna International Group. Please go ahead.

Adele Mao – Susquehanna International Group

Hi, a couple questions from me. First of all Jim you mentioned that you looked into trends in different geographic regions to come up with the 2009 guidance can you just elaborate a little more what is the mix from the regions for the quarter and how do you see this evolved into 2009?

James Weber

You know for the quarter the mix in North America was about 60% and it was fairly even between from EMEA and APAC for the remaining 40% I think as we look into 2009 I think we’ll probably see more of the growth coming from our international in particular APAC.

Adele Mao – Susquehanna International Group

Okay that’s helpful and also looking at your account balance, account receivable balance it seems that this quarter have gone up a little bit it is more of a seasonal trend or if there is anything particular that we should be aware of.

James Weber

This is seasonal trend, $25 million this year it was $26.1 million last year, and what we typically looked at the DSOs, which were fairly flat with the same period of last year. So, I don’t think there is any unusual trends there.

Adele Mao – Susquehanna International Group

Okay, great. Thank you.

Operator

Thank you ma’am. [Operator Instructions] Our next question comes from the line of Rajesh Ghai of Thinkequity. Please go ahead.

Rajesh Ghai – Thinkequity

Hi, good afternoon, congratulations on the sequential growth.

James Weber

Thank you.

Rajesh Ghai – Thinkequity

I just wanted to check with you about the product mix that you expect in 2009 as regards to VTL, NSS and CDP, would you expect to protect is to be and how what was it in 2008? If you want to break it up, outlines.

Bernie Wu

Yeah, our product mix as I think Jim mentioned it was roughly about half of our business is VTL and de-dup and then there is another fairly large chunk of it which is our CDP product line and relatively small percentage below 2% is what you would call our NSS product line and a lot of that is through our large deal we have in China with Huawei-3Com

Rajesh Ghai – Thinkequity

And for 2009 what do you expect that that do you expect VTL to grow in the same pace in the rest of the business.

Bernie Wu

I think in general, the market forecast are showing that VTL market is still in a growth pace I don’t expect however, I don’t’ expected to grow as fast as our CDP replication area or our unnecessary that I believe there is will outperform but I think all areas we expect to grow, but I think the mutual change slightly toward our CDP and other accessories.

Rajesh Ghai – Thinkequity

And how much do you expect from PrimeVault is that something that you expect to take off this year or that could going to be…

Bernie Wu

Yeah I expect we will have the progress on board, but the those types of models are shift subscription base. So, the revenue we’ll build up overtimes similarly where our maintenance revenue was built up overtime. So, I expect have a progress on board but I don’t expect, a huge percentage of our revenue like that to, certainly gone on the below 10% of our revenue would be coming from that area.

Rajesh Ghai – Thinkequity

And how was China in the fourth quarter and what your expectations of 2009?

Bernie Wu

As far as Q4 China was around 10% a little bit over 10% we always - we typically have a strong Q1 and in China its always our strongest quarter. As far as full year for ’09 we expect China to be above 5% of our total revenue on a full year basis.

Rajesh Ghai – Thinkequity

Okay and as far as hiring is concerned can you comment on the timing of the hiring you mentioned that you will continue hiring through 2009 that going towards the back in those or there going to be spread all over the year.

Bernie Wu

You know I think you must see a gradually throughout the year we don’t look at, we are going to be opportunistic and we see opportunities where we think we could accelerate our revenue growth will continue to higher, but I think you feel a pretty throughout the home entire year. I mean we should see it the hiring happened evenly throughout the year.

Rajesh Ghai – Thinkequity

All right, thank you so much. Thanks for taking my questions.

Bernie Wu

Thanks.

Operator

Thank you sir (Operator Instructions) Our next question comes from the line of Gab Lowy with Noble Research. Please go ahead.

Gabriel Lowy – Noble Research

Thank you good afternoon gentlemen and congratulations on very nice results in a difficult market. I had a couple of questions I came in a little bit late, but I was wondering if maybe you had a little bit of time talk about the progress that you are seeing with Continuous Data Protection for the Vmware infrastructure. What’s happening there where are you in terms of deployments how widely is that now into the channel and maybe what’s your expectations are for that piece of business as we go through this year.

Reijane Huai

Okay let me answer you question was regard to Vmware. In general, server virtualization creates not in the involvement for storage specialization. We also post the great a challenge to address the back of DR issue, because the old model the house based model is no longer adequate in past we have one efficacy one physical mission so under the Vmware you have 10s or 20 even more machine running or share with a fiscal resources for those lender we’ll try to saw the back up is that virtual for Vmware is not going to work. Since our product is developed on the ground up at the narrow based infrastructure. And our products are fully certify with Vmware as the software virtualizer, software based storage virtualizer also at the member of Vmware five recovery management committee. We are seeing a great deals of advantage for our sales people to offer unique neuro based CDP solution to help Vmware customer attack not only the challenge of the local recovery both of these that’s recovery at the FIN 5 which means it is extremely economical but the Vmware reseller to introduce our solutions in today’s economy to the Vmware install based to allow them to apply a narrow based model to beautifully address the local recovery and remote DR issue at the same time.

Gabriel Lowy – Noble Research

That’s great. And your expectations for that, how it might be ramping without looking specific numbers behind it but sort of…

Reijane Huai

Well we have a very comprehensive and extremely competitive solution in the continue paper replication CDP space so, we expect our CDPs to continue to ramp up from now well into the 2009 and in the future. But nobody have taken a narrow-based approach to address this issue in a holistic fashion. That’s will do.

Gabriel Lowy – Noble Research

Great, do you think that business one day, lets say 3 to 5 years down the line could actually rival the VTL business in size?

ReiJane Huai

Let me just explain how VTL and CDP are deployed and in the meaning to IT. VTL or de-duplication are the fixes to the problem created by the tape backup software.

Gabriel Lowy – Noble Research

Right.

ReiJane Huai

And they are trying to improve the quality of tape backup which is most of the ITs data protection solution today. They are relying on the tape backup as the data protection solution and this solution has been wrong for over 20 years. This has started to show its edge and inadequacy. The only and the best way to address data protection in today, mere working environment with VMwaware with Microsoft Hyper-V, is to solve the problem from the ground up at the mere working levels. That’s how our CDP solutions are built has become complete enhancements to raise the quality of backup for once the day to continuous also to raise the quality of restore for hours in a very, very undefined and certain challenged manner to the method that can be backed by the service level agreement. So we are very comfortable about our CDP’s ability to improve the tape backup issue from atop and also to address the data protection issue for the entire enterprise from remote office, data center all the way to the data center.

James Weber

Yeah let me also comment from a business market potential aspect. The CDP technology that we are talking about both the backup software area as an alternative to conventional backup for improving recovery times. It also, that technology we have also started the replication area. If you look at those two markets, those are in the order of roughly $5 billion market segment of the enterprise storage software market, those two segments and as I alluded to earlier, our VTL business is just around the 50% of our business and then a much smaller component is our NSS. So there already is actually quite a lot of business that we are doing today with CDP replication and the total available market potential is quite excellent.

Gabriel Lowy – Noble Research

This isn’t the type of technology that eventually customers today they’re deploying in parallel with VTL solutions. This isn’t something that eventually would replace that if they decided to phase out, tape solutions and just eventually go with a full type CDP for both physical and virtual server protection?

Bernie Wu

There are some environments where some of our customers are just CDP only sites, some of our customers are CDP and VTL, and some are just VTL only. The CDP technology in some cases, where people are going completely away from a tape paradigm. In some case of makes sense.

Gabriel Lowy – Noble Research

Okay and if I may just to change course one other one. Jim mentioned that, for the full year ’09 the Chinese market would account for somewhere in the range of 5% of revenues. I would thank that with the project with Chinese Academy of Sciences the clustered product solution that’s coming out of there as well, prime volt the ramping of the partners, that - that would start to contribute more meaningfully and sort of be consistently above 10% and growing faster than the rest of the world. Is it just that the maturity of the market it’s such that it still needs to cultivate and there is a lot of eventualizing going on? Or is there something more to in terms of why that isn’t becoming a more meaningful contributor on a sustained basis?

Reijane Huai

Well as the 2009 continue to unfolds and we have better visibility over the business in China we’ll definitely update everybody the expected percentage of the business from China. We’re definitely comfortable of our position and competitive position in China. But given the uncertainty of the economy, plus we do know whether the economy will have any material impact on the business condition in China. Therefore we like to be prudent and that’s why Jim put out the 5% as the baseline. But we are certainly extremely bullish about presence in China and growth in the other parts of Asia such as Japan.

Gabriel Lowy – Noble Research

Okay thanks, last one and then I’ll feed. A tongue-in-cheek question, it’s early days, but I don’t know if you folks have had a chance to see this CommVault Simpana 8.0 if you had any thoughts or observations about that from what you might have learned so far?

ReiJane Huai

Well my only comment is the DNA. Their products evolve based on a tape backup architecture. Our products are built from the ground up as the mere working solution. If feel any tape backup solution and you lead to restore your data, you need to bring your data over the network evolve data transfer, which means you do not know, how long would it take you to complete the restoration. Since our product is built based on virtualization and networking MI as the underlying infrastructure. We can enable our customer to access the data, in extremely determinative manner at 100% guarantee by our SOA. And I remember to our customer is, if you want to restore anything in the data center, come in. If you have a disaster, you can recover the entire site back in less then 30 minutes. I think this is a sample plan that cannot be met by any company in the industry today and also in the near future. That’s difference between our approach and the approach taken by the legacy product in trying to solve the business issues, the networking issues in today’s (Inaudible)

Gabriel Lowy – Noble Research

That’s helpful. Thank you very much, continued success.

ReiJane Huai

Thank you.

Bernie Wu

Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the question-and-answer session. I would now like to turn the conference back to Mr. Weber for any closing remarks. Please go ahead, sir.

James Weber

Yeah I would like to thank you for everybody for calling in today and thank you for your interest in FalconStor. Even during these tough economic times, I think we are well positioned with our products and our financial position and we look forward to reporting to you next quarter on our progress during 2009. Thank you.

Operator

Thank you, sir. Ladies and gentlemen this does conclude the FalconStor Software’s Q4 and full year 2008 earnings conference call. If you would like to listen to a replay of today’s conference please dial 303-590-3000 or 1800-405-2236 and enter passcode 11125532. Once again if you would like to listen to a replay of today's conference please dial 303-590-3000 or 1800-405-2236 and enter passcode 11125532. ACT would like to thank you for your participation. You may now disconnect. Have a pleasant day.

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