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): January 11, 2011

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 1.01. Entry into a Material Definitive Agreement.

The information contained in Item 5.02 is incorporated by reference into this Item 1.01.

Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On January 11, 2011, the Board of Directors (the “Board”) of FalconStor Software, Inc. (the “Company”) appointed James P. McNiel to serve as the Company’s Chief Executive Officer and President, effective January 1, 2011, and elected Mr. McNiel to the Board.  Mr. McNiel’s performance as the Company’s Interim Chief Executive Officer and Interim President, as well as his professional background and experience, particularly in the storage industry, have led the Board to conclude that Mr. McNiel should serve as a director.

Mr. McNiel, age 47, had served as the Company’s Interim Chief Executive Officer and Interim President since September 2010 and as the Company’s Chief Strategy Officer since December 2009.  Prior to joining the Company, Mr. McNiel was the co-founder and Chief Executive Officer of Fifth Generation Systems, a social networking startup, from August 2006 to October 2009.  Previously, he served as a General Partner at Pequot Ventures (now FirstMark Capital), a venture capital firm, from 1997 to 2006, and Executive Vice President, Corporate Development of Cheyenne Software, a software company, from 1990 to 1997.  Mr. McNiel studied Business and Advanced Management at The Wharton School of the University of Pennsylvania and Finance at the Massachusetts Institute of Technology Sloan School of Management.< /font>

On January 11, 2011, in connection with Mr. McNiel’s appointment as the Company’s Chief Executive Officer and President, the Company entered into an employment agreement with Mr. McNiel dated January 11, 2011 (the “Employment Agreement”).  Pursuant to the Employment Agreement, Mr. McNiel will serve as the Company’s Chief Executive Officer and President for three years commencing as of January 1, 2011 and will receive an annual base salary of $400,000 in cash.  The Employment Agreement also provides that Mr. McNiel is entitled to transportation services, or at the election of the Company, reimbursement of up to $35,000 of expenses annually incurred by Mr. McNiel, commuting to the Company’s offices and traveling to other locations where business is being conducted.

Additionally, on January 11, 2011, pursuant to the Employment Agreement, the Compensation Committee of the Board granted to Mr. McNiel (i) an option to purchase 300,000 shares of the Company’s common stock (“Common Stock”), pursuant to the Company’s 2006 Incentive Stock Plan, as amended (the “2006 Plan”), (ii) an option to purchase 1,220,000 shares of Common Stock, pursuant to a Stand-Alone Stock Option Agreement dated January 11, 2011 (the “Option Agreement”), subject to stockholder approval of the Option Agreement, and (iii) 90,000 restricted shares of Common Stock (the “Restricted Shares”) pursuant to the 2006 Plan.  The abovementioned options were granted at an exercise price of 3.22 per share and will vest and become exercisable 33% on each of January 11, 2012 and January 11, 2013, and 34% on January 1, 2014; provided, however, if stockholder approval of the Option Agreement is not obtained on or prior to January 11, 2012, the Option Agreement and the grant made thereunder will be deemed void ab initio and Mr. McNiel will receive in lieu of the option such number of restricted shares of Common Stock having a value equivalent to that of the option as of the date of the original option grant (the “Replacement Shares”).  The Restricted Shares will vest in equal installments on January 11, 2012 and January 11, 2013.

The Employment Agreement and Option Agreement provide that in the event of a Change of Control (as defined under the Employment Agreement) during the term of the Mr. McNiel’s employment with Company, all of Mr. McNiel’s outstanding unvested stock options and shares of restricted Common Stock granted pursuant to the Employment Agreement and Option Agreement will automatically vest and be fully exercisable, as applicable, on the date of the Change of Control.

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Pursuant to the Employment Agreement, if Mr. McNiel’s employment is terminated by the Company without Cause or by Mr. McNiel for Good Reason (each as defined under the Employment Agreement), Mr. McNiel will be entitled to his earned but unpaid base salary and other earned and accrued benefits (the “Accrued Compensation”) and a lump sum cash payment equal to 12 months of his annual base salary.  If the term of the Employment Agreement expires and is not subsequently extended, Mr. McNiel will be entitled to the Accrued Compensation and a lump sum cash payment equal to six months of his annual base salary.  If Mr. McNiel’s employment is terminated as a result of his death, his estate will be entitled to the Accrued Compensation and cash payments equal to 12 months of his annual base salary. & #160;The Employment Agreement also contains certain non-compete provisions effective for 1 year following the termination or expiration of the Employment Agreement, unless the Employment Agreement is terminated by the Company without Cause or by Mr. McNiel for Good Reason, as well as standard confidentiality provisions.

The foregoing descriptions of the Employment Agreement and the Option Agreement are not complete and are qualified in their entirety by reference to the full text of such documents, copies of which are filed herewith as Exhibit 10.1 and Exhibit 10.2, respectively, and are incorporated herein by reference.

Item 9.01.                      Financial Statements and Exhibits.

(d)           Exhibits.

Exhibit No. Description

10.1 Employment Agreement dated January 11, 2011 by and between FalconStor Software, Inc. and James P. McNiel.

10.2 Stand-Alone Stock Option Agreement dated January 11, 2011 by and between FalconStor Software, Inc. and James P. McNiel.

99.1 Press Release dated January 12, 2011.

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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:  January 14, 2011	FALCONSTOR SOFTWARE, INC.
	By:	/s/ Seth R. Horowitz
		Name:	Seth R. Horowitz
		Title:	Vice President and General Counsel

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EXHIBIT INDEX

Exhibit No. Description

10.1 Employment Agreement dated January 11, 2011 by and between FalconStor Software, Inc. and James P. McNiel.

10.2 Stand-Alone Stock Option Agreement dated January 11, 2011 by and between FalconStor Software, Inc. and James P. McNiel.

99.1 Press Release dated January 12, 2011.

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EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is entered into this 11th day of January, 2011 by and between FalconStor Software, Inc., a Delaware corporation (the “Company” or “FalconStor”), and James P. McNiel (the “Employee”), whose address is 18 Central Drive, Glen Head, NY 11545.

WHEREAS, the Company desires to employ Employee and to enter into an agreement embodying the terms of such employment; and

WHEREAS, the Employee desires to accept employment with the Company, subject to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows:

1.           Definitions.

As used in this Agreement, the following terms will have the following meanings:

(a)           Board. “Board” or “Board of Directors” means the Board of Directors of Company.

(b)           Cause. “Cause” means the occurrence of either of the following:

(i)         Willful misconduct or gross neglect in carrying out the duties of President or Chief Executive Officer, provided that no action or inaction is “willful” unless done or omitted in bad faith by the Employee or without the reasonable belief of the Employee that the action or omission was not adverse to the best interests of the Company, or

(ii)        The conviction of the Employee (or the entering by the Employee of a plea of guilty or nolo contendere) to A) any felony, (B) any misdemeanor involving moral turpitude, or (C) any crime involving the Company or its property, or

(iii)       A breach of Sections 6(b), (c) or (e) of this Agreement.

(c)           “Change of Control” means and includes each and any of the following:

(i)            An acquisition (other than directly from the Company) of any voting securities of the Company (the “Voting Securities”) by any “Person” (as the term “person” is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of (1) the then-outstanding shares of common stock of the Company (or any other securities into which such shares of common stock are changed or for which such shares of common stock are exchanged) (the “Shares”) or (2) the combined voting power of the Compan y’s then-outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred pursuant to this paragraph (a), the acquisition of Shares or Voting Securities in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute a Change in Control.  A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person the majority of the voting power, voting equity securities or equity interest of which is owned, directly or indirectly, by the Company (for purposes of this definition, a “Related Entity”), (ii) the Company or any Related Entity, or (iii) any Person in connection with a “Non-Control Transaction” (as hereinafter defined);

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(ii)           The individuals who, as of the Effective Date, are members of the board of directors of the Company (the “Incumbent Board”), cease for any reason to constitute at least a majority of the members of the board of directors of the Company or, following a Merger (as hereinafter defined), the board of directors of (x) the corporation resulting from such Merger (the “Surviving Corporation”), if fifty percent (50%) or more of the combined voting power of the then-outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly, by another Person (a “Parent Corporation”) or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation; provided, however, that, if the election, or nomination for election by the Company’s common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered a member of the Incumbent Board; and provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the board of directors of the Company (a “Proxy Contest”), including by reason of any agreement intended to avoid or settle any Proxy Contest ; or

(iii)           The consummation of:

(i)           A merger, consolidation or reorganization (1) with or into the Company or (2) in which securities of the Company are issued (a “Merger”), unless such Merger is a “Non-Control Transaction.”  A “Non-Control Transaction” shall mean a Merger in which:

(A)        the stockholders of the Company immediately before such Merger own directly or indirectly immediately following such Merger at least fifty percent (50%) of the combined voting power of the outstanding voting securities of (x) the Surviving Corporation, if there is no Parent Corporation or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation;

(B)         the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Merger constitute at least a majority of the members of the board of directors of (x) the Surviving Corporation, if there is no Parent Corporation, or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation; and

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(C)         no Person other than (1) the Company, (2) any Related Entity, or (3) any employee benefit plan (or any trust forming a part thereof) that, immediately prior to the Merger, was maintained by the Company or any Related Entity, or (4) any Person who, immediately prior to the Merger had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Shares or Voting Securities, has Beneficial Ownership, directly or indirectly, of twenty percent (20%) or more of the combined voting power of the outstanding voting securities or common stock of (x) the Surviving Corporation, if fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly by a Parent Co rporation, or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation;

(ii)          A complete liquidation or dissolution of the Company; or

(iii)         The sale or other disposition of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any Person (other than (x) a transfer to a Related Entity, (y) a transfer under conditions that would constitute a Non-Control Transaction, with the disposition of assets being regarded as a Merger for this purpose or (z) the distribution to the Company’s stockholders of the stock of a Related Entity or any other assets).

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding Shares or Voting Securities as a result of the acquisition of Shares or Voting Securities by the Company which, by reducing the number of Shares or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons; provided, that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Shares or Voting Securities by the Company and, after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additiona l Shares or Voting Securities and such Beneficial Ownership increases the percentage of the then outstanding Shares or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.

(d)           Code.  “Code” means the Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulations and other interpretive guidance issued thereunder.

(e)           Disability.  For purposes of this Agreement, “Disability” means, as a result of a physical or mental injury or illness, Employee is unable to perform the essential functions of Employee’s job with reasonable accommodation for a period of (i) ninety (90) consecutive days or (ii) one hundred and twenty (120) days in any twelve (12) month period. Any question as to the existence of a Disability to which the Employee and the Company can not agree will be determined in writing by a qualified independent physician mutually acceptable to Employee and the Company.  If Employee and the Company can not agree as to a qualified independent physician, each will appoint a physici an and those two physicians will select a third who shall make such determination in writing.  This written determination of Disability will be final and conclusive for all purposes under this Agreement.

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(f)           Good Reason.  “Good Reason” means the occurrence of any of the following events or conditions without Employee’s prior written consent:

(i)         a material diminution in Employee’s title, position or reporting responsibility;

(ii)        a material diminution in Employee’s authority, duties or responsibilities;

(iii)       a material diminution in Employee’s base compensation;

(iv)      failure of the Board or the relevant committee thereof to nominate the Employee for election as a member of the Board of Directors of the Company whenever his term as such a member shall expire;

(v)       a material change in the geographic location at which Employee must perform services for the Company (and the Company and Employee hereby agree that any involuntary relocation of Employee’s principal place of business to a location outside of the New York metropolitan area would constitute a material change); or

(vi)      any other action or inaction that constitutes a material breach by the Company or any successor or affiliate of its obligations to Employee under this Agreement.

Employee must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without Employee’s prior written consent within fifteen (15) days after the Employee has received knowledge of the occurrence of such event. The Company or any successor or affiliate will have a period of thirty (30) days to cure such event or condition after receipt of written notice of such event or condition from Employee. Any voluntary termination of Employee’s employment for “Good Reason” following such thirty (30) day cure period must occur no later than the date that is five (5) days following the initial occurrence of such event or condition which occurred without Employee’s prior written consent.

2.           Services to Be Rendered.

(a)           Duties and Responsibilities.  Employee shall serve as President and Chief Executive Officer of the Company, commencing on January 1, 2011. Employee shall report directly to the Board of Directors and its committees. Employee shall perform those duties and have such authority and powers as are customarily associated with the office of a Chief Executive Officer of a company engaged in a business similar to the business of the Company.  The Company shall elect Employee, and Employee hereby consents to serve as a director of Company, without any additional salary or compensation.  Employee’s primary place of work shall be the Company’s principal place of business in Melville, New York, or such other location as directed by the Board (but not in violation of Section 1(f)(v) of this Agreement).

(b)           Exclusive Services. Employee shall at all times faithfully, diligently, and to the best of his ability, perform the lawful duties that may be assigned to Employee hereunder and, except during vacation periods or absences due to temporary illnesses, shall devote substantially all of his productive time and efforts to the performance of such duties. In no case will Employee be requested or directed to perform any act that is in violation of applicable law. Subject to the terms of Section 9 of this Agreement, this shall not preclude Employee from (i) devoting reasonable time to personal and family investments, (ii) serving on non-profit and corporate boards and committees, (iii) participating in industry a ssociations, and (iv) delivering lectures, fulfilling speaking engagements, or teaching at educational institutions, provided such activities do not interfere with his duties to the Company, or do not present a conflict of interest with respect to the Company’s products or services, as determined in good faith by the Board of Directors. The Company specifically acknowledges that Employee is currently a board member of the Foundation for Fighting Blindness, the National Neurovision Research Institute, and Interfusio, and will be permitted the flexibility to perform his duties and responsibilities in such capacities to the same extent as currently provided.

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3.           Term. Subject to Section 5 hereof, the term of this Agreement is three (3) years commencing on January 1, 2011 and ending on December 31, 2013. (the “Term”).

4.           Compensation and Benefits.

The Company shall pay or provide, as the case may be, to Employee the compensation and other benefits and rights set forth in this Section 4.

(a)           Base Salary.  The Company shall pay Employee a base salary during each year of this Agreement of $400,000 per year in cash (the “Base Salary”), payable at such intervals as the Company pays employee salaries generally.  Employee’s Base Salary will be subject to review annually by the Board of Directors and may be increased but not decreased as the Board shall determine based on the Employee’s job performance.

(b)           Benefits.  Employee is entitled to participate in and receive benefits under all the Company’s benefit plans and arrangements, including, without limitation, group disability, life insurance, health insurance, and retirement and pension plans, and any employee benefit plan or arrangement made available in the future by the Company to any of its senior Employees generally, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.

(c)           Expenses.  The Company shall reimburse Employee for reasonable out-of-pocket business expenses incurred in connection with the performance of his duties hereunder, provided such expenses conform to any travel and expense plan adopted by the Company during the Term that is applicable to all United States employees of the Company, including but not limited to (i) annual memberships in business organizations and associations, subject to Employee furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures.

(d)           Vacation.  The Company shall provide Employee with paid vacation on an as-needed basis to be agreed in good faith by the Employee and the Board.

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                (e)           Stock Options.

(i)         The Compensation Committee of the Board (the “Compensation Committee”) shall grant Employee at its first meeting following January 1, 2011 (A) an option to purchase 300,000 shares of the Company’s common stock, pursuant to the FalconStor Software Inc. 2006 Incentive Stock Plan (the “2006 Plan”), and (B) an option to purchase 1,220,000 shares of the Company’s common stock, pursuant to that certain Stand-Alone Stock Option Agreement in the form attached as Exhibit A hereto (the “Option Agreement”), subject to stockholder approval of the Option Agreement (collectively, the “Stock Options”).  The Stock Options will have an exercise price per share e qual to the closing price of the Company’s common stock on the NASDAQ Global Market on the date of grant.  The Stock Options will vest and become exercisable in accordance with the following schedule: thirty three percent (33%) on the first anniversary of the date of this Agreement; thirty three percent (33%) on the second anniversary of the date of this Agreement; and thirty-four percent (34%) on January 1 of the third year following the date of this Agreement; provided, however, with respect to the options granted pursuant to the Option Agreement, if stockholder approval of the Option Agreement is not obtained on or prior to the first anniversary of the date of this Agreement, the Option Agreement and the grant made thereunder will be deemed void ab initio.  For the avoidance of doubt, assuming st ockholder approval of the Option Agreement, the Stock Options will vest and become exercisable as follows: thirty three percent (33%) on January 11, 2012; thirty three percent (33%) on January 11, 2013, and thirty-four percent (34%) on January 1, 2014.  The Stock Options will each have a ten (10) year term and will be subject to the terms and conditions of the 2006 Plan and the Option Agreement, as applicable, except as otherwise stated in this Agreement.

(ii)        In the event stockholder approval of the Option Agreement is not obtained on or prior to the first anniversary of the date of this Agreement, the Compensation Committee shall grant Employee at its first meeting following the first anniversary of the date of this Agreement (which shall be held promptly after such date) such number of restricted shares of the Company’s common stock (the “Replacement Shares”) having a value equivalent to that of the option to purchase 1,220,000 shares granted pursuant to the Option Agreement as of the date of the original option grant, as reasonably determined by the Compensation Committee.

(iii)       In the event of a Change of Control, as defined under Section 1(c) of this Agreement, during the term of the Employee’s employment with Company, all of Employee’s outstanding unvested Stock Options and Replacement Shares will automatically vest and be fully exercisable, as applicable, on the date of such Change of Control.

(f)           Restricted Stock.  The Compensation Committee shall grant Employee at its first meeting following January 1, 2011 90,000 restricted shares of the Company’s common stock (the “Restricted Shares”), pursuant to the 2006 Plan.  The Restricted Shares will vest and the restrictions thereon will lapse as follows: fifty percent (50%) on the first anniversary of the date of this Agreement; and fifty percent (50%) on the second anniversary of the date of this Agreement.  In the event of a Change of Control, as defined under Section 1(c) of this Agreement, during the term of the Employee’s employment with Company, all of Employee’s unvested Restricted Sha res will automatically vest on the date of such Change of Control.

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(g)           Transportation.  During the Term, the Company shall provide transportation  so that the Employee may commute to and from the Company’s offices and to travel to other locations where business is being conducted.  In lieu of providing the transportation, on prior notice to the Employee, the Company may elect to reimburse the Employee for up to $35,000 of expenses incurred by the Employee annually commuting to the Company’s offices and traveling to other locations where business is being conducted.

(h)           Provisions Applicable to Reimbursements.  To the extent that any payments or reimbursements provided to Employee under this Agreement are deemed to constitute compensation to which Treasury Regulation Section 1.409A-3(i)(1)(iv) would apply, such amounts shall be paid or reimbursed to Employee promptly, but in no event later than December 31 of the year following the year in which the expense is incurred. The amount of any such payments eligible for reimbursement in one year shall not affect the payments or expenses that are eligible for payment or reimbursement in any other taxable year, and Employee’s right to such payments or reimbursement shall not be subject to liquidation or exchang e for any other benefit.

(i)           Taxes.  Employee acknowledges that Employee has sole responsibility for the payment of all federal, state and local taxes, if any, on all compensation and benefits.

5.           Termination; Notice to Executive; Consequences of Termination.

(a)           Notwithstanding any provision of this Agreement to the contrary, the employment of the Executive hereunder will terminate on the date of  the first of the following to occur (the “Termination Date”):

(i)         the date of the Executive’s death;

(ii)        the date on which the Company gives the Employee written notice of termination on account of Disability;

(iii)       the date on which the Company gives the Employee written notice of termination for Cause;

(iv)       ten (10) days after the date on which the Company gives the Employee written notice of termination without Cause;

(v)        five (5) days after the Employee gives written notice of his  resignation from the Company for Good Reason (i.e., following the applicable cure period);

(vi)       the date on which the Employee gives written notice of his resignation without Good Reason;

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(vii)      the expiration of the Term.

(b)           In lieu of any other remedies available to the Employee, and in exchange for written general release of the Company and its employees, officers and directors, Employee will be entitled to receive the following benefits upon termination of employment:

(i)         Termination without Cause or for Good Reason.  If Employee’s employment is terminated by the Company without Cause or by Employee for Good Reason, the Company shall provide Employee:

(A)        his fully earned but unpaid Base Salary, when due, through the Termination Date at the rate then in effect, plus all other amounts which Employee earned and accrued under any compensation plan of the Company at the time of termination;

(B)         a lump sum cash payment equal to twelve (12) months of the Employee’s annual Base Salary ( including both cash salary under Section 4(a)(ii) and the cash equivalent of shares of the Company’s common stock under Section 4(a)(ii)) as in effect immediately prior to Termination Date, payable within fifteen (15) days following the Termination Date; and

(C)         the right to COBRA benefits, at Employee’s cost.

(ii)        Termination Due to Expiration of Agreement.  If the Term of this agreement expires and the parties do not enter into a subsequent agreement extending Employee’s employment as President and Chief Executive Officer, the Company shall provide Employee:

(A)        his fully earned but unpaid Base Salary, when due, through the Termination Date at the rate then in effect, plus all other amounts which Employee earned and accrued under any compensation plan of the Company at the time of termination;

(B)         a lump sum cash payment equal to six (6)  months of the Employee’s annual Base Salary ( including both cash salary under Section 4(a)(ii) and the cash equivalent of shares of the Company’s common stock under Section 4(a)(ii))  as in effect immediately prior to the Termination Date, payable within fifteen (15) days following the Termination Date; and

(C)         the right to COBRA benefits, at Employee’s cost;

provided, however, the Employee will not be entitled to receive any payments or benefits under this Section 5(b)(iii) if,

(I) the Company declines to enter into a renewal agreement with the Employee because the Employee breached Section 6(b), (c) or (e) of this Employment Agreement; or

(II) the Employee has been terminated for Cause hereunder;  or

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(III) the Employee has received a change of control payment from the Company under any other plan, program or agreement that provides change of control benefits that are at least equal to the amount that would be received by the Employee pursuant to this Section 5(b)(iii).

(c)           Termination as a result of Death.  If Employee's employment is terminated as a result of death, the Company shall provide Employee’s estate:

(i)         his fully earned but unpaid Base Salary, when due, through the Termination Date at the rate then in effect, plus all other amounts which Employee earned and accrued under any compensation plan of the Company at the Termination Date; and

(ii)        A death benefit equivalent to one (1) times Employee’s annual Base Salary ( including both cash salary under Section 4(a)(ii) and the cash equivalent of shares of the Company’s common stock under Section 4(a)(ii)) at the rate then in effect payable as may be determined by the Company, but not less often than six (6) equal monthly installments, payable on the last day of each month, commencing in the month subsequent to the month in which the death occurs.

(d)           Termination for Cause or Voluntary Resignation without Good Reason.  If Employee’s employment is terminated by the Company for Cause or by Employee without Good Reason,  except as otherwise set forth in this Agreement, the Company shall not have any other or further obligations to Employee under this Agreement (including any financial obligations), except that the Company shall pay Employee (i) Employee’s fully earned but unpaid Base Salary, through the Termination Date at the rate then in effect, and (ii) all other amounts or benefits  earned and accrued by Employee  under any compensation, retirement or benefit plan  of the Company at the T ermination Date in accordance with the terms of such plans or practices, including, without limitation, any continuation of benefits required by COBRA or other applicable law, such benefits continuation to be at Employee’s cost.

(e)           Delay of Payments.  Notwithstanding anything herein to the contrary, to the extent any payments to Employee, or his estate pursuant to Section 5 are treated as non-qualified deferred compensation subject to Section 409A of the Code, then (i) no amount shall be payable pursuant to such section unless Employee’s termination of employment constitutes a “separation from service” with the Company (as such term is defined in Treasury Regulation Section 1.409A-1(h) and any successor provision thereto) (a “Separation from Service”), and (ii) if at the time of Employee’s Separation from Service Employee is a “specified employee” as defined in Section 409A of the Code, as determined by the Company in accordance with Section 409A of the Code, and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Employee) until the date that is six (6) months following Employee’s Separation from Service (or such earlier date as is permitted under Section 409A of the Code); provided, however, that the Company shall use its reasonable efforts to minimize such deferral and the dollar amount of payments or benefits so impacted.

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6.           Certain Covenants.

(a)           Return of Company Property. The Employee agrees that following the termination of his employment for any reason, he will return all property of the Company which is then in or thereafter comes into the Employee’s possession, including, but not limited to, mobile equipment, documents, contracts, agreements, plans, photographs, books, notes, data stored electronically on tapes, computer disks or in any other manner and all copies of the foregoing as well as any other materials or equipment supplied by the Company to the Employee.

(b)           Confidentiality.

(i)         The Employee acknowledges that he has already had access to the Confidential Information (as hereinafter defined) of the Company, and that he will come into possession of additional Confidential Information in connection with his employment as President and Chief Executive Officer.  The Employee will treat and hold as confidential all of the Confidential Information of the Company and refrain from disclosing or using any of the Confidential Information of the Company except in connection with his employment, and except as otherwise required hereunder or as may be required by law.  If, in the absence of a protective order or the receipt of a waiver hereunder, the Employee is compelled to disclose any Confidential Information under any court order, the Employe e may disclose the Confidential Information; provided, however, that the Employee will use his best efforts to obtain, at the request and expense of Company, an order or other assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed as the Company will designate.

(ii)        In the event of any breach by the Employee of any provision of Section 6(b) herein, the Company will be entitled to injunctive or other equitable relief, restraining the Employee from using or disclosing any Confidential Information in whole or in part, or from engaging in conduct that would constitute a breach of the obligations of the Employee under Section 6(b).  Such relief will be in addition to and not in lieu of any other remedies that may be available, including an action for the recovery of damages.  The provisions set forth in Section 6(b) will survive the termination of this Agreement.

(iii)       For purposes of this Agreement, “Confidential Information” means with respect to the Company any and all confidential or proprietary information and trade secrets of the Company including all information of any nature and in any form which at the time or times concerned is not in the public domain (other than because of illegal or unauthorized disclosure) and which relates to any one or more of the aspects of the Company’s business (including, but not limited to, the assets of the Company), and accounts, pricing policies, customer lists, referral lists, supplier lists, computer software and hardware, or any other materials relating to the Company's business or Company's customers or any trade secrets or Confidential Information, including, without limitation, any busine ss or operational methods, know-how, marketing plans or strategies, business acquisition plans, financial or other performance data, personnel and other policies of Company, whether generated by the Employee or by any other person.

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(c)           Non-Competition.

(i)         During the Term, and for One (1) year thereafter, unless the Employee is terminated without Cause or resigns for Good Reason, the Employee will not, directly or indirectly, alone or as a partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or stockholder of any entity (other than passive stockholdings of less than two (2%) per cent of the outstanding equity of an entity whose securities are registered under the Securities Act of 1933, as amended),  engage in any business activity which is in competition with the Company.  For purposes of this Agreement, a business activity is in competition with the Company if it if any manner involves the development and/or marketing of computer hardware and/or software for &# 160; data protection or  storage management.

(ii)        The Employee acknowledges that a breach or threatened breach of the provisions contained in this Section 6(c) will cause the Company irreparable injury.  The Employee therefore agrees that the Company will be entitled, in addition to any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining the Employee from any such violation or threatened violations.

(d)           Ability to Enter into Agreement.  The Employee represents and warrants that his services for the Company and the execution and delivery of this Agreement and compliance with all the terms of this Agreement does not and will not breach any written or oral agreement he has entered into relating to intellectual property, non-competition, non-solicitation, or that would  otherwise prohibit or restrict in any way the Employee’s obligations under this Agreement.  The Employee has not and will not enter into any written or oral agreement in conflict with this Agreement.

(e)           Inventions.  With respect to Inventions (including but not limited to software) made or conceived by the Employee, whether or not during the hours of his employment or with the use of the Company's facilities, materials or personnel, either solely or jointly with others during the Employee’s employment by the Company:

(i) The Employee shall inform the Company promptly and fully of such Inventions by written report, setting forth in detail the procedures employed and the results achieved.  A report shall be submitted by the Employee upon completion of any studies or research projects undertaken on the Company's behalf whether or not in the Employee's opinion a given projecthasresulted in an Invention.

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(ii) The Employee shall apply, at the Company's request and expense, for the United States and/or foreign letters patent or other registrations either in the Employee's name or otherwise, as the Company shall desire.

(iii) The Employee hereby assigns and agrees to assign to the Company all of his right and interest to any and all such Inventions and to make applications for United States and/or foreign letters patent or other registrations granted upon such Invention.

(iv) The Employee shall acknowledge and deliver promptly to the Company, without charge to the Company, but at its expense, such written instruments and do such other acts in support of his inventorship, as may be necessary in the opinion of the Company to obtain and maintain United States and/or foreign letters patent or other registration and to vest the entire right in such Inventions, patents and patent applications in the Company. The Employee agrees that if the Company is unable because of the Employee’s mental or physical incapacity or unavailability or for any other reason to secure the Employee’s signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering Inventions assigned to the Company as above, the Employee hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as the Employee’s agent and attorney in fact, to act for and in the Employee’s behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the application for, prosecution, issuance, maintenance or transfer of letters patent or copyright registrations thereon with the same legal force and effect as if originally executed by the Employee.  The Employee hereby waives and irrevocably quitclaims to the Company any and all claims, of any nature whatsoever, which the Employee now or hereafter may have for infringement of any and all proprietary rights assigned to the Company.

(v) The Company shall also have the royalty-free right to use in its business, and to make, use, and sell products and/or services derived from any Inventions, discoveries, concepts and ideas, whether or not patentable, including, but not limited to applications, methods, formulas and techniques, as well as improvements or know-how, whether or not within the scope of Inventions, but which are obtained, created or made by the Employee during the Employment Period, without payment of any additional compensation to the Employee.

(vi) For the purposes of this Employment Agreement, "Inventions" means discoveries, concepts and ideas, whether patentable or not, including but not limited to processes, methods, formulas and techniques as well as improvements or know-how.

(f)           It is the desire and intent of the parties that the provisions of this Section 6 shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought.  Accordingly, if any particular provision of this Section 6 shall be adjudicated to be invalid or unenforceable, such provision of this Section 6 shall be deemed amended to delete from theportion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provisions of this Section 6 in the particular jurisdiction in which such adjudication is made and, further, only to the extent required in order for this Section 6 to be enforceable.

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7.           Indemnification.  The Company will indemnify the Employee to the extent set forth in the Company’s charter and by-laws and by applicable law.

8.           Entire Agreement; Amendment; Waiver; and Pre-emption.  This Agreement constitutes the entire Agreement between the parties hereto with respect to the subject matter thereof and merges and supersedes all prior understandings or agreements between the parties.  This Agreement may not be amended, changed or modified absent a writing signed by both parties or, with respect to a waiver, signed by the party to be charged.  This Agreement will be binding upon and inure to the benefit of the heirs, executors, administrators, successors and permitted assigns of the parties hereto.  The Company’s failure to enforce any provision of this Agreement will not constitute a w aiver of its right to enforce such provision.  In the event of any conflict between the terms of this Agreement and the terms of any other employment related plan or agreement, including but not limited to the Option Agreement, the terms of this Agreement will prevail.

9.           Assignment.  Except as expressly provided herein, neither this Agreement nor any of the rights or obligations hereunder may be assigned or delegated by any party hereto without the express written consent of the other party hereto, provided, however, that no consent will be required for the assignment to any successor to all or substantially all of the Company’s assets or business (whether by purchase, merger, consolidation or otherwise).

10.         Severability.  If any of the covenants or other provisions in this Agreement is hereafter construed to be invalid or unenforceable, it is the intention of the parties that the same will not affect the remainder of the covenant or covenants or other provisions, which will be given full effect without regard to the invalid portions.  It is the intention of the parties that this Agreement be enforced to the fullest extent permitted by law.  Accordingly, if any court construes any provision or clause of this Agreement, or any portion thereof, to be illegal, void or unenforceable because of the scope of such covenant or provision, it is the intention of the parties that the Court will modify such a provision to render its scope legal and enforceable to the maximum extent permitted by law and, in its modified form, such provision will then be enforceable and will be enforced.

11.         Section 409A Compliance.  This Agreement is intended to comply with Internal Revenue Code Section 409A and final Treasury regulations.

12.         Notices.  All notices provided for in this Agreement will be in writing signed by the party giving such notice sent by (i) registered or certified mail, return receipt requested, (ii) any prepaid overnight courier delivery service then in general us, (iii) hand or (iv) facsimile transmission or similar means of communication if such transmission of such notice is confirmed immediately by any of the other means set forth above, as follows:

If to the Company:	c/o FalconStor Software, Inc.
	2 Quadrangle, Suite 2S01
	Melville, New York 11747
	Attention: Chief Financial Officer

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If to the Employee:	James P. McNiel
	18 Central Drive
	Melville, New York 11545

or at such other address as will be indicated to either party in writing.  Notice of change of address will be effective only upon receipt. A notice provided in the manner required herein will be deemed given : (i) if delivered personally, upon delivery; (ii) if sent by overnight courier, on the first business day after it is sent; (iii) if mailed, three business days after mailing; and (iv) if sent by fax, upon actual receipt of the fax or confirmation thereof (whichever is first).

13.           Governing Law; Jurisdiction. This Agreement will be governed and construed in accordance with the laws of the State of New York applicable to agreements executed and to be performed wholly within such State, without regard to any principles of conflicts of law. Each party agrees that any action or proceedings relating to this Agreement seeking injunctive relief or enforcement of an arbitration award may be instituted against such party in any appropriate court in the State of New York and hereby irrevocably submits to the jurisdiction of the State and Federal courts of the State of New York and waives any claim of forum nonconveniens with respect thereto.

14.           Descriptive Headings.  The Section headings contained herein are for reference purposes only and will not in any way affect the meaning or interpretation of this Agreement.

15.           Legal Fees. After this Agreement becomes effective, the Company agrees to pay to the Employee’s counsel, Ford & Harrison LLP, the total legal fees and disbursements incurred by the Employee in connection with the negotiation of the terms and conditions of the Employee’s employment and the preparation of this Agreement with the Company not to exceed $10,000. This amount will be paid by the Company within 30 days of presentation of Ford & Harrison LLP’s invoice.

16.           Counterparts.  This Agreement may be executed in one or more counterparts, which, together, will constitute one and the same agreement.

[Signature Page Follows]

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[Signature Page to McNiel Employment Agreement]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above.

FALCONSTOR SOFTWARE, INC.
By:	/s/ Eli Oxenhorn
	Eli Oxenhorn
	Chairman of the Board of Directors

/s/ James P. McNiel

James P. McNiel

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EX-10.2

Exhibit 10.2

STAND-ALONE STOCK OPTION AGREEMENT

THIS STAND-ALONE STOCK OPTION AGREEMENT (this “Agreement”) dated as of the 11th day of January, 2011 by and between FalconStor Software, Inc., a Delaware corporation (the “Company”), and James P. McNiel (the “Optionee”).

RECITALS

WHEREAS, the Optionee and the Company have executed that certain Employment Agreement dated January 11, 2011 (the “Employment Agreement”);

WHEREAS, pursuant to the terms of the Employment Agreement, on the date hereof the Compensation Committee (the “Committee”) of the Company’s Board of Directors (the “Board”) granted to the Optionee, subject to stockholder approval of this Agreement, a nonqualified stock option to purchase all or any part of 1,220,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), subject to and upon the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows:

1. Grant of Option.  This Agreement evidences the Committee’s grant to the Optionee of the right and option to purchase, subject to and on the terms and conditions set forth herein, and subject to stockholder approval of this Agreement, all or any part of 1,220,000 shares of the Company’s Common Stock (the “Shares”) at an exercise price per Share equal to the closing price of the Common Stock on the NASDAQ Global Market on the date hereof (the “Option”), exercisable from time to time, subject to the provisions of this Agreement, prior to 5:00 p.m., New York City time, the ten (10) year anniversary of the date hereof, unless earlier terminated pu rsuant to Section 8.  If stockholder approval of this Agreement is not obtained on or prior to the first anniversary of the date of the Employment Agreement, this Agreement and the grant made hereunder will be deemed void ab initio.

2. Exercisability of Option.  Subject to Section 1 and Section 8 hereof, the Option will vest and become exercisable in accordance with the following schedule: thirty three percent (33%) on the first anniversary of the date of the Employment Agreement; thirty three percent (33%) on the second anniversary of the date of the Employment Agreement; and thirty-four percent (34%) on January 1 of the third year following the date of the Employment Agreement.  For the avoidance of doubt, assuming stockholder approval of this Agreement, the Option will vest and become exercisable as follows: thirty three percent (33%) on January 11, 2012; thirty three percent (33%) on Januar y 11, 2013, and thirty-four percent (34%) on January 1, 2014.

3. Method of Exercise of Option.

3.1 Method of Exercise.  The Option to the extent then exercisable may be exercised in whole or in part by giving written notice to the Company specifying the number of Shares to be purchased, accompanied by payment in full of the purchase price, in cash, or by check or such other instrument as may be acceptable to the Committee.  As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may be made at the election of the Optionee (a) in the form of shares of Common Stock owned by the Optionee (based on the Fair Market Value (as defined below) of the shares) that are not the subject of any pledge or security interest, (b) in the for m of shares of Common Stock withheld by the Company from the shares of Common Stock otherwise to be received with such withheld shares of Common Stock having a Fair Market Value equal to the exercise price, or (c) by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any shares surrendered to the Company is at least equal to such exercise price.  Notwithstanding the forgoing, the Optionee may not take any actions that are prohibited by the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the Securities and Exchange Commission or any agency thereunder.  The Optionee shall have the right to dividends and other rights of a stockholder with respect to the Shares purchased upon exercise of the Option at such time as the Optionee (a) has given written notice of exercise and has paid in full for such Shares, and (b) has satisfied such conditions that may be imposed by the Company with respect to th e withholding of taxes.

3.2 Fair Market Value.  “Fair Market Value” means the closing price on the date of grant on the principal securities exchange on which shares of Common Stock are listed (if the shares of Common Stock are so listed), or, if not so listed or regularly quoted, the mean between the closing bid and asked prices of publicly traded shares of Common Stock in the over the counter market, or, if such bid and asked prices shall not be available, as reported by any nationally recognized quotation service selected by the Company, or as determined by the Committee in a manner consistent with the provisions of the United States Internal Revenue Code of 1986, as amended. Anything in this S ection 3.2 to the contrary notwithstanding, in no event shall the purchase price of a share of Common Stock be less than the minimum price permitted under the rules and policies of any national securities exchange on which the shares of Common Stock are listed.

4. Tax Withholding.  Upon any exercise of the Option in whole or in part, the Company shall have the right at its option to (a) require the Optionee (or personal representative or beneficiary, as the case may be) to pay or provide for payment of the amount of any taxes which the Company may be required to withhold with respect to the Option or (b) deduct from any amount payable in cash the amount of any taxes which the Company may be required to withhold with respect to such cash payment. In any case where a tax is required to be withheld in connection with the delivery of shares of Common Stock, the Board may in its sole discretion grant to the Optionee the right to elect, p ursuant to such rules and subject to such conditions as the Board may establish, to have the Company reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares valued at their then Fair Market Value to satisfy such withholding obligation.

5. No Transferability; Limited Exception to Transfer Restrictions.  The Option is not transferable and may be exercised solely by the Optionee during his lifetime or after his death by the person or persons entitled thereto under his will or the laws of descent and distribution.  The Committee, in its sole discretion, may permit a transfer of the Option in whole or in part to (a) a trust for the benefit of the Optionee, (b) a member of the Optionee’s immediate family (or a trust for his or her benefit) or (c) pursuant to a domestic relations order. Any attempt to transfer, assign, pledge or otherwise dispose of, or to subject to execution, attachment or similar process, the Option in whole or in part contrary to the provisions hereof shall be void and ineffective and shall give no right to the purported transferee.

6. No Employment Rights.  Nothing contained in this Agreement shall confer upon the Optionee any right to continue in the employ or other service of the Company or any of its subsidiaries, nor constitute any contract or agreement of employment or other service, nor shall interfere in any way with the right of the Company to change the Optionee’s compensation or other benefits or to terminate the employment of the Optionee, with or without cause; provided, however, that nothing contained in this Agreement shall adversely affect any independent contractu al right of the Optionee, including but not limited to the Optionee’s rights under the Employment Agreement, without his consent thereto.

7. Regulations.  This Agreement and the grant and exercise of the Option hereunder, and the obligation of the Company to sell and deliver shares under the Option shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies, national securities exchanges and interdealer quotation systems as may be required.  Additionally, notwithstanding any other provision in this Agreement, the Option may not be exercised in whole or in part unless and until the Shares to be issued upon the exercise thereof have been registered under the Securities Act of 1933, as amended, and applicable state securities laws, or are, in the opinion of co unsel to the Company, exempt from such registration in the United States.  The Company shall not be under any obligation to register under applicable federal or state securities laws any Shares to be issued upon the exercise of the Option granted hereunder in order to permit the exercise of the Option in whole or in part and the issuance and sale of the Shares subject to the Option, although the Company may in its sole discretion register such Shares at such time as the Company shall determine.  If the Company chooses to comply with such an exemption from registration, the Shares to be issued upon the exercise of the Option may, at the direction of the Committee, bear an appropriate restrictive legend restricting the transfer or pledge of the Shares represented thereby, and the Committee may also give appropriate stop transfer instructions with respect to the Shares to the Company's transfer agent.  The Company undertakes that following stockholder approval of this Agreement the Company will seek to register the resale of the Shares.  Additionally, the Optionee understands and acknowledges that he is subject to the Company’s rules regarding insider trading contained in the Company’s Code of Conduct or otherwise.

8. Adjustment and Termination upon Certain Events.

8.1 Adjustments.  If there shall occur any extraordinary dividend or other extraordinary distribution in respect of the Common Stock (whether in the form of cash, Common Stock, other securities, or other property), or any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend), reverse stock split, reorganization, merger, combination, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Company, or there shall occur any similar, unusual or extraordinary corporate transaction or event in respect of the Common Stock or a sale of substantially all the assets of the Company as an entirety, then the Board shall, in such manner and to such extent (if any) as it deems appropriate and equitable (a) proportionately adjust any or all of (i) the number and type of shares of Common Stock (or other securities) which thereafter may be made the subject of the Option, (ii) the number, amount and type of shares of Common Stock (or other securities or property) subject to the Option, (iii) the grant, purchase, or exercise price of the Option, (iv) the securities, cash or other property deliverable upon exercise of the Option, or (v) the performance standards appropriate to the Option, or (b) in the case of an extraordinary dividend or other distribution, recapitalization, reclassification, merger, reorganization, consolidation, combination, sale of assets, split up, exchange, or spin off, make provision for a cash payment or for the substitution or exchange of the Option or the cash, securities or property deliverable to the Optionee based upon the distribution or consideration payable to holders of the Common Stock of the Company upon or in respect of such event. In any of such events, the Board may take such action sufficiently prior to such event if necessary to permit the Optionee to realize the benefits intended to be conveyed with respect to the underlying shares in the same manner as is available to stockholders generally.

8.2 Change of Control.  In the event there is a Change of Control (as defined under the Employment Agreement), any outstanding unvested Options will automatically vest and become exercisable on the date of such Change of Control in accordance with the terms of the Employment Agreement and the 2005 Key Executive Severance Protection Plan.

8.3 Effect of Termination of Employment.  

(a) Termination by Death.  Unless otherwise determined by the Committee, if the Optionee’s employment with or service to the Company terminates by reason of death, the Option may thereafter be exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the Optionee under the will of the Optionee, for a period of one (1) year after the date of such death or until the expiration of the stated term of the Option as provided under this Agreement, whichever period is shorter.

(b) Termination by Reason of Disability.  Unless otherwise determined by the Committee, if the Optionee’s employment with or service to the Company terminates by reason of total and permanent disability, the Option may thereafter be exercised, to the extent it was exercisable at the time of termination due to disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after three (3) months after the date of such termination of employment or service or the expiration of the stated term of the Option, whichever period is shorter; provided, however, that, if the Optionee dies within such three (3) month period, the Option shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of one (1) year after the date of such death or for the stated term of the Option, whichever period is shorter.

(c) Termination by Reason of Retirement.  Unless otherwise determined by the Committee, if the Optionee’s employment with or service to the Company terminates by reason of Normal or Early Retirement (as such terms are defined below), the Option may thereafter be exercised to the extent it was exercisable at the time of such Normal or Early Retirement (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after three (3) months after the date of such termination of employment or service or the expiration of the stated term of the Option, whichever date is earlier; provided, however, that, if the Optionee dies within such three (3) month period, the Option shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one (1) year after the date of such death or for the stated term of the Option, whichever period is shorter.  For purposes of this paragraph, “Normal Retirement” shall mean retirement from active employment with the Company on or after the normal retirement date specified in the applicable Company pension plan or if no such pension plan, age 65, and “Early Retirement” shall mean retirement from active employment with the Company pursuant to the early retirement provisions of the applicable Company pension plan or if no such pension plan, age 55.

(d) Other Termination.  Unless otherwise determined by the Committee, if the Optionee’s employment with or service to the Company for any reason other than death, disability or Normal or Early Retirement, the Option shall thereupon terminate, except that the portion of the Option that was exercisable on the date of such termination of employment or service may be exercised for the lesser of thirty (30) days after the date of termination or the balance of the Option’s term if the Optionee’s employment or service with the Company is terminated by the Company without Cause (as defined under the Employment Agreement).  The transfer of the Optionee from the employ of or service to the Company to the employ of or service to a subsidiary, or vice versa, or from one subsidiary to another, shall not be deemed to constitute a termination of employment or service for purposes of this Agreement.

9. Limitation of Liability.  No member of the Committee, or any officer or employee of the Company acting on behalf of the Committee, shall be personally liable for any action, determination or interpretation taken or made in good faith with respect to this Agreement, and all members of the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation.

10. Shares to be Reserved.  The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement.

11. Assignment.  Except as expressly provided herein, neither this Agreement nor any of the rights or obligations hereunder may be assigned or delegated by any party hereto without the express written consent of the other party hereto, provided, however, that no consent will be required for the assignment to any successor to all or substantially all of the Company’s assets or business (whether by purchase, merger, consolidation or otherwise).

12. Notices.  All notices provided for in this Agreement will be in writing signed by the party giving such notice sent by (i) registered or certified mail, return receipt requested, (ii) any prepaid overnight courier delivery service then in general us, (iii) hand or (iv) facsimile transmission or similar means of communication if such transmission of such notice is confirmed immediately by any of the other means set forth above, as follows:

If to the Company:                               c/o FalconStor Software, Inc.

2 Quadrangle, Suite 2S01

Melville, New York 11747

Attention: Chief Financial Officer

If to the Employee:                               James P. McNiel

18 Central Drive

Melville, New York 11545

or at such other address as will be indicated to either party in writing.  Notice of change of address will be effective only upon receipt. A notice provided in the manner required herein will be deemed given : (i) if delivered personally, upon delivery; (ii) if sent by overnight courier, on the first business day after it is sent; (iii) if mailed, three business days after mailing; and (iv) if sent by fax, upon actual receipt of the fax or confirmation thereof (whichever is first).

13. Waiver.  The Company’s failure to enforce any provision of this Agreement will not constitute a waiver of its right to enforce such provision.  The parties reserve the right to waive by mutual written consent for a specific period and under specific conditions any provision of this Agreement, provided that such waiver shall be limited to the period and conditions specified by mutual written consent and shall in no way constitute a general waiver, or be considered as evidence of any given interpretation of any provision so waived.

14.  Governing Law; Jurisdiction.  This Agreement will be governed and construed in accordance with the laws of the State of New York applicable to agreements executed and to be performed wholly within such State, without regard to any principles of conflicts of law. Each party agrees that any action or proceedings relating to this Agreement seeking injunctive relief or enforcement of an arbitration award may be instituted against such party in any appropriate court in the State of New York and hereby irrevocably submits to the jurisdiction of the State and Federal courts of the State of New York and waives any claim of forum nonconveniens with respect thereto.

15.  Descriptive Headings.  The Section headings contained herein are for reference purposes only and will not in any way affect the meaning or interpretation of this Agreement.

16. Severability.  If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the extent possible.

17. Entire Agreement.  The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms.  The parties further agree that this Agreement, the Employment Agreement and any modifications made pursuant hereto and thereto constitute the complete and exclusive written expression of the terms of the agreement between the parties, and supercede all prior or contemporaneous proposals, oral or written, understandings, representations, conditions, warranties, covenants, and all other communications between the parties relating to the subject matter of this Agreement.  This Agreement may not be amended, changed or modified ab sent a writing signed by both parties.  In the event of any conflict between the terms of this Agreement and the terms of the Employment Agreement, the terms of the Employment Agreement will prevail.

18. Counterparts.  This Agreement may be executed in one or more counterparts, which, together, will constitute one and the same agreement.

19. Compliance With Laws.  Notwithstanding anything else contained herein to the contrary, this Agreement, the granting and vesting of the Option and the offer, issuance and delivery of Shares under this Agreement are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities laws and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered in respect of this Agreement will be subject to such restrictions, and to any restriction s the Company may require to preserve a pooling of interests under generally accepted accounting principles, and the person acquiring such securities will, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above.

FALCONSTOR SOFTWARE, INC.
By:	/s/ Eli Oxenhorn
	Eli Oxenhorn
	Chairman of the Board of Directors

/s/ James P. McNiel

James P. McNiel

EX-99.1

Exhibit 99.1

For more information, contact:

Roman Kichorowsky	Melissa Cohen
FalconStor Software, Inc.	Metis Communications
631-773-4303	617-236-0500
romank@falconstor.com	melissa@metiscomm.com

FalconStor Software Names James P. McNiel President and CEO

MELVILLE, N.Y., January 12, 2011—FalconStor Software, Inc. (NASDAQ: FALC), the market leader in disk-based data protection solutions, today announced that it has named James P. McNiel as president and CEO and has elected McNiel to the board of directors. In his new capacity, McNiel is charged with bringing the company into focus on a single, integrated strategy for defining and delivering the next-generation of data protection solutions. In his previous roles as FalconStor’s chief strategy officer and most recently as interim president and interim CEO, McNiel designed the corporate strategy that now drives product development, worldwide marketing initiatives and strategic alliances that will enhance FalconStor's market leadership and brand recognition.

“This is an auspicious time for FalconStor, with its depth of technical expertise and strong industry partnerships, to lead the way towards addressing IT’s most pressing business continuity challenges,” said McNiel. “Traditional methods of backup and recovery are broken, and we have the opportunity to redefine data protection to match the way IT delivers mission-critical services to its users. We are designing the industry’s first service-oriented data protection solution for private data centers and the cloud, and it is upon this foundation that we intend to build FalconStor’s future.”

Previously an executive vice president of corporate development at Cheyenne Software, McNiel joined FalconStor in 2009 as chief strategy officer. In addition to his role in building Cheyenne into a billion dollar industry leader, McNiel, as a general partner at Pequot Ventures (now FirstMark Capital), led successful investments in Netegrity, NetGear and OutlookSoft. McNiel brings to FalconStor his broad experience in directing venture capital investments, advising promising startups, designing products that address emerging markets, and orchestrating IPOs in the high-tech industry.

“We invited Jim to join FalconStor’s executive team for his demonstrated ability to recognize market opportunities, articulate a vision and lead teams of highly qualified individuals in the pursuit of building successful businesses,” said Eli Oxenhorn, non-executive chairman of FalconStor’s board of directors. “The entire board is behind Jim’s appointment to president and CEO, and we expect to see FalconStor achieve its full potential under his leadership.”

As part of McNiel’s companywide initiative for excellence in every functional area, McNiel has recruited former Symantec sales executive John Turner to join FalconStor as vice president of North American sales (see related announcement, “FalconStor Names Industry Sales Leader John Turner Vice President of North American Sales”, dated January 12, 2011).

In addition, McNiel has promoted Walter Curti, who oversaw research and development for the last two years, to the position of chief technology officer and has named Bob Daly, formerly vice president of managed services, as vice president of R&D. Curti has more than 25 years of engineering and management experience in the software industry and before FalconStor held senior executive roles at Cheyenne Software and CA Technologies. Bob Daly is a 30-year veteran of the software industry who joined FalconStor in early 2010 and was vice president of engineering at Cheyenne Software before its acquisition by CA Technologies.

About FalconStor Software

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 Solutions 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).

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FalconStor, FalconStor Software, HyperFS, and IPStor are registered trademarks and TOTALLY Open is a trademark 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.

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