8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 16, 2010

FALCONSTOR SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware	000-23970	77-0216135
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)
2 Huntington Quadrangle, Melville, New York		11747
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 631-777-5188

N/A

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02.Results of Operations and Financial Condition

On November 16, 2010, the Company issued a press release announcing its results of operations for the fiscal quarter ended September 30, 2010.

The text of a press release issued by the Company is furnished as Exhibit 99.1 and is incorporated herein by reference.

Item 7.01. Regulation FD Disclosure

During a public conference call on November 16, 2010, the Company announced that Walter Curti had been named Vice President and Chief Technical Officer.  The Company also announced that its Vice President of Sales for North America, Wendy Petty, had taken a leave of absence and that the Company had commenced a search for a new head of sales for North America.

Item 8.01. Other Events

During a public conference call on November 16, 2010, the Company announced that Walter Curti had been named Vice President and Chief Technical Officer.  The Company also announced that its Vice President of Sales for North America, Wendy Petty, had taken a leave and that the Company had commenced a search for a new head of sales for North America.

Item 9.01. Financial Statements and Exhibits.

(d)         Exhibits.

Exhibit No.	Description
99.1	Press release of the Company dated November 16, 2010.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date:  November 16, 2010
	By:	/s/ James Weber
		Name:	James Weber
		Title:	Chief Financial Officer, Vice President, Interim Chief Operating Officer and Treasurer

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Exhibit Index

Exhibit No.	Description
99.1	Press release of the Company dated November 16, 2010.

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EX-99.1

Exhibit 99.1

Contact:	Joanne Ferrara, Investor Relations
	631-773-5813
	joanne.ferrara@falconstor.com

FalconStor Files Third Quarter 10-Q

MELVILLE, N.Y., November 16, 2010— FalconStor Software, Inc. (NASDAQ: FALC), the provider of TOTALLY Open™ data protection solutions, announced that it filed its Quarterly Report on Form 10-Q for the third quarter of 2010.

Total revenues for the third quarter of 2010 were $19.0 million, a decrease of 6% over the previous quarter and down 12% compared with the same period a year ago.  GAAP loss from operations for the third quarter of 2010 was $4.8 million, down from $5.1 million in the previous quarter and up from $2.5 million for the same period a year ago.

Non-GAAP loss from operations was $2.6 million in the third quarter of 2010, down from $2.8 million in the previous quarter and up from a $0.2 million loss for the same period a year ago.

For the nine months ended September 30, 2010, revenues were $56.4 million, compared with $67.0 million for the same period a year ago.  GAAP loss from operations for the nine month period was $18.4 million compared with a loss of $3.0 million in 2009.

Non-GAAP loss from operations was $11.3 million for the nine months ended September 30, 2010, compared with non-GAAP income from operations of $3.7 million in 2009.

GAAP net loss was $26.4 million, or $0.58 per share for the three months ended September 30, 2010, and $35.3million, or $0.78 per share for the nine-month period ended September 30, 2010.  The net loss includes tax provisions of $21.8 million and $17.0 million for the three and nine months ended September 30, 2010, respectively. During the third quarter of 2010, the Company concluded that its domestic deferred tax assets could not be realized on a more-likely-than-not basis, therefore a valuation allowance of $16.2 million was required to be recorded on these previously recognized deferred tax assets.  This valuation allowance had no cash impact and was recorded within the tax provision for the three and nine months ended September 30, 2010.

GAAP net loss for the three and nine months ended September 30, 2009 was $2.0 million, or $0.05 per share, and $1.6 million, or $0.04 per share, respectively.

Non-GAAP operating results exclude stock-based compensation expenses of $2.2 million for the three months ended September 30, 2010 and 2009 and $2.3 million for the three months ended June 30, 2010.  For the nine months ended September 30, 2010 and 2009, non-GAAP operating results exclude stock-based compensation expense of $7.2 million and $6.7 million, respectively.

The Company closed the quarter with $33.8 million in cash, cash equivalents, and marketable securities.  Deferred revenue at September 30, 2010 was $20.5 million.

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“Gartner and others agree that traditional backup is broken due to exponential data growth, server virtualization, and round-the-clock demands on mission-critical applications – and it is in FalconStor’s DNA to address this problem,” said Jim McNiel, interim president and interim CEO of FalconStor Software.  “We have the technology and the expertise to redefine data protection to match the way IT directors view their data center – as a collection of services.  As a result, we are building the industry’s first service-oriented data protection solution for primary data centers and the cloud. It is upon this foundation that we expect to grow our business.”

The Company will host a conference call to discuss its financial results on Tuesday, November 16, 2010 at 8:00 a.m. EST. To participate in the conference call, please dial:

Toll Free: 1-877-941-6012

International: +1-480-248-5085

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=143523172&RG=1&UID

Meeting: FalconStor Q3 2010 Earnings

Meeting password: q3numbers

Meeting Number: 484 349 617

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 November 16, 2010 at 10:30 a.m. EST through 11:59 p.m. EST on November 20, 2010. To listen to the replay of the call, dial toll free: 1-800-406-7325 or International: +1-303-590-3030, passcode: 4386406, or visit our website at www.falconstor.com/investors.

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 inv estors in allowing for greater transparency into the supplemental information used by management in its financial and operational decision-making. The non-GAAP financial measures exclude noncash stock-based compensation charges for all periods presented. For a reconciliation of our GAAP and non-GAAP financial results, please refer to our Reconciliation of GAAP to Non-GAAP Financial Measures, which is included in this press release.

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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), File-interface Deduplication System (FDS), and Network Storage Server (NSS), each enabled with WAN-optimized replication for disaster recovery and remote office protection, and the HyperFS™ file system. FalconStor products are available as OEM or branded solutions from industry leaders, including Acer, Data Direct Networks, Dynamic Solut ions International, EMC, Fujitsu, Hitachi Data Systems, HP, Huawei, Pillar Data Systems, SGI, SeaChange and Spectra Logic 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. FalconStor is an active member of the Storage Networking Industry Association (SNIA). 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, FalconStor Software and IPStor are registered trademarks and TOTALLY Open and HyperFS are trademarks of FalconStor Software, Inc., in the U.S. and other countries. All other company and product names contained herein may be trademarks of their respective holders.

Links to websites or pages controlled by parties other than FalconStor are provided for the reader’s convenience and information only.  FalconStor does not incorporate into this release the information found at those links nor does FalconStor represent or warrant that any information found at those links is complete or accurate.  Use of information obtained by following these links is at the reader’s own risk.

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FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2010		December 31, 2009
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	8,808,032	$	15,752,528
Marketable securities		23,952,698		24,952,966
Accounts receivable, net		19,177,614		24,948,261
Prepaid expenses and other current assets		1,721,781		1,556,787
Income tax receivable		515,082		830,816
Inventory		2,049,972		329,657
Deferred tax assets, net		-		4,320,773
Total current assets		56,225,179		72,691,788
Property and equipment, net		6,120,576		7,601,727
Long-term marketable securities		1,087,313		1,077,466
Deferred tax assets, net		85,918		9,698,859
Other assets, net		2,425,569		2,958,229
Goodwill		4,150,339		4,150,339
Other intangible assets, net		475,470		823,416
Total assets	$	70,570,364	$	99,001,824
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,188,625	$	1,570,190
Accrued expenses		8,227,244		8,454,743
Deferred revenue, net		15,233,041		16,570,076
Total current liabilities		24,648,910		26,595,009
Other long-term liabilities		2,422,714		608,907
Deferred revenue, net		5,243,547		5,644,994
Total liabilities		32,315,171		32,848,910
Commitments and Contingencies
Total stockholders' equity		38,255,193		66,152,914
Total liabilities and stockholders' equity	$	70,570,364	$	99,001,824

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FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenues :
Product revenues	$	11,366,493		$	14,397,983		$	33,382,701		$	46,087,209
Support and services revenues		7,609,339			7,142,186			22,983,495			20,942,665
		18,975,832			21,540,169			56,366,196			67,029,874
Cost of revenues:
Product		2,120,727			855,566			6,179,952			2,015,567
Support and service		3,104,108			3,456,215			10,020,153			10,133,565
Total cost of revenues		5,224,835			4,311,781			16,200,105			12,149,132
Gross profit	$	13,750,997		$	17,228,388		$	40,166,091		$	54,880,742
Operating expenses:
Research and development costs		6,445,992			6,911,215			20,211,811			19,890,526
Selling and marketing		9,724,007			10,391,931			31,165,975			31,023,224
General and administrative		2,403,954			2,388,860			7,217,428			6,996,357
Total operating expenses		18,573,953			19,692,006			58,595,214			57,910,107
Operating loss		(4,822,956	)		(2,463,618	)		(18,429,123	)		(3,029,365	)
Interest and other income, net		205,518			239,516			103,077			18,811
Loss before income taxes		(4,617,438	)		(2,224,102	)		(18,326,046	)		(3,010,554	)
Provision (benefit) for income taxes		21,799,389			(192,697	)		16,996,344			(1,394,902	)
Net loss	$	(26,416,827	)	$	(2,031,405	)	$	(35,322,390	)	$	(1,615,652	)
Basic net loss per share	$	(0.58	)	$	(0.05	)	$	(0.78	)	$	(0.04	)
Diluted net loss per share	$	(0.58	)	$	(0.05	)	$	(0.78	)	$	(0.04	)
Weighted average basic shares outstanding		45,836,621			44,803,379			45,367,998			44,812,807
Weighted average diluted shares outstanding		45,836,621			44,803,379			45,367,998			44,812,807

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FalconStor Software, Inc. and Subsidiaries

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
GAAP loss from operations	$	(4,822,956	)	$	(2,463,618	)	$	(18,429,123	)	$	(3,029,365	)
Add: non-cash stock option expense (1)		2,197,947			2,241,792			7,170,617			6,712,549
Non-GAAP (loss) income from  operations		(2,625,009	)		(221,826	)		(11,258,506	)		3,683,184
GAAP net loss	$	(26,416,827	)	$	(2,031,405	)	$	(35,322,390	)	$	(1,615,652	)
Add: non-cash stock option expense,net of income taxes (2)		(300,169	)		2,149,332			3,106,827			5,187,743
Non-GAAP net (loss) income		(26,716,996	)		117,927			(32,215,563	)		3,572,091
GAAP gross margin – Product		81	%		94	%		81	%		96	%
Add: non-cash stock option expense (1)		0	%		0	%		0	%		0	%
Non-GAAP gross margin – Product		81	%		94	%		82	%		96	%
GAAP gross margin – Support and Service		59	%		52	%		56	%		52	%
Add: non-cash stock option expense (1)		4	%		6	%		4	%		5	%
Non-GAAP gross margin – Support and Service		63	%		57	%		60	%		57	%
GAAP operating margin		(25	%)		(11	%)		(33	%)		(5	%)
Add: non-cash stock option expense (1)		12	%		10	%		13	%		10	%
Non-GAAP operating margin		(14	%)		(1	%)		(20	%)		5	%
GAAP Basic EPS	$	(0.58	)	$	(0.05	)	$	(0.78	)	$	(0.04	)
Add: non-cash stock option expense,net of income taxes (2)		(0.01	)		0.05			0.07			0.12
Non-GAAP Basic EPS		(0.58	)		0.00			(0.71	)		0.08
GAAP Diluted EPS	$	(0.58	)	$	(0.05	)	$	(0.78	)	$	(0.04	)
Add: non-cash stock option expense,net of income taxes (2)		(0.01	)		0.05			0.07			0.11
Non-GAAP Diluted EPS		(0.58	)		0.00			(0.71	)		0.08
Weighted average basic shares Outstanding (GAAP and as adjusted)		45,836,621			44,803,379			45,367,998			44,812,807
Weighted average diluted sharesOutstanding (GAAP and as adjusted)		45,836,621			46,823,133			45,367,998			46,041,703

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Footnotes:

(1) Represents non-cash, stock-based compensation charges as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Cost of revenues – Product	$	9,755	$	7,086	$	23,696	$	21,027
Cost of revenues – Support and service		277,839		397,414		887,930		1,149,568
Research and development costs		680,179		813,929		2,480,509		2,281,750
Selling and marketing		978,559		731,571		2,875,275		2,425,043
General and administrative		251,615		291,792		903,207		835,161
Total non-cash stock-based compensation expense	$	2,197,947	$	2,241,792	$	7,170,617	$	6,712,549

(2) Represents the effects of non-cash stock-based compensation expense recognized in accordance with the FASB Accounting Standards Codification, Topic 718, for the three and nine months ended September 30, 2010 and 2009, net of related income tax effects.

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