Short sales are tough, and I'm happy to hear this is a home you really want, but unfortunately all you and your agent can do is wait for one of the parties to drop out.
They have a ratified contract - both buyer and seller have signed the contract and agreed to exclusively work to make that deal go through. You can hope that the bank will come back asking for a higher sale price and that the first contract will be withdrawn. You can hope the buyer loses interest and uses one of their options to withdraw their offer. That happens often, and that's why the seller's agent took your back-up contract.
A very high percentage of short sale contracts fall through because of changes in what the bank will accept or because the buyer gets cold feet or finds another home they would prefer. So there's still hope for you, but it requires much patience. Your agent should keep in touch with the listing agent to stay aware of how things are going with the process, and continue to show you other properties.
Good luck, and hope you get your dream home, whether it's this one or another one.