(2) Share-Based Payment Arrangements (Tables)

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements

Details of Stock Option Plan

The following table summarizes the plans under which the Company was able to grant equity compensation as of September 30, 2012:

	Shares		Shares Available		Shares		Last Date for Grant
Name of Plan	Authorized		for Grant		Outstanding		of Shares
FalconStor Software, Inc., 2006 Incentive Stock Plan		12,224,133		1,928,878		7,758,484	May 17, 2016
FalconStor Software, Inc., 2010 Outside Directors Equity		400,000		280,000		90,300	May 8, 2020
Compensation Plan

Schedule of Equity Awards Outstanding

The following table summarizes the Company’s equity plans that have expired but that still have equity awards outstanding as of September 30, 2012:

	Shares Available		Shares
Name of Plan	for Grant		Outstanding
FalconStor Software, Inc., 2000 Stock Option Plan		--		3,142,612
1994 Outside Directors Stock Option Plan		--		40,000
2004 Outside Directors Stock Option Plan		--		190,000
FalconStor Software, Inc., 2007 Outside Directors Equity		--		170,000
Compensation Plan
Stand-Alone Stock Option Agreement between		--		1,220,000
the Company and James P. McNiel

Schedule of Stock Option Activity

The following table summarizes stock option activity during the nine months ended September 30, 2012:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Options			Price		Life (Years)		Value
Options Outstanding at December 31, 2011		14,456,722		$	4.95
Granted		521,200		$	2.94
Exercised		(82,900	)	$	2.45
Canceled		(10,000	)	$	7.98
Forfeited		(428,290	)	$	6.88
Options Outstanding at March 31, 2012		14,456,732		$	4.83		6.12	$	5,497,712
Granted		408,000		$	3.21
Exercised		(187,680	)	$	2.24
Canceled		(666,380	)	$	5.09
Forfeited		(1,846,570	)	$	4.28
Options Outstanding at June 30, 2012		12,164,102		$	4.89		6.46	$	453,155
Granted		1,093,500		$	1.94
Exercised		—		$	0.00
Canceled		(8,250	)	$	4.12
Forfeited		(822,029	)	$	4.63
Options Outstanding at September 30, 2012		12,427,323		$	4.65		6.39	$	567,339
Options Exercisable at September 30, 2012		7,713,914		$	5.64		4.92	$	116,094

Schedule Of Share Based Compensation Recognized

The Company recognized share-based compensation expense for all awards issued under the Company’s stock equity plans in the following line items in the condensed consolidated statements of operations:

	Three months ended September 30,
	2012		2011
Cost of revenues - Product	$	113	$	1,169
Cost of revenues - Support and Service		53,314		111,830
Research and development costs		127,982		235,782
Selling and marketing		388,167		585,814
General and administrative		486,202		501,983
	$	1,055,778	$	1,436,578
	Nine months ended September 30,
		2012		2011
Cost of revenues - Product	$	212	$	2,641
Cost of revenues - Support and Service		103,158		385,032
Research and development costs		572,170		1,044,193
Selling and marketing		1,272,823		1,471,093
General and administrative		1,645,793		1,188,919
	$	3,594,156	$	4,091,878

Stock Based Compensation Expense - Restricted Stock

A summary of the total stock-based compensation expense related to restricted stock awards and restricted stock units, which is included in the Company’s total share-based compensation expense for each respective period, is as follows:

	Three months ended September 30,
	2012		2011
Directors, officers and employees	$	82,284	$	384,578
Non-employee consultants		13,488		-
	$	95,772	$	384,578
	Nine months ended September 30,
		2012		2011
Directors, officers and employees	$	489,864	$	1,106,076
Non-employee consultants		13,488		21,882
	$	503,352	$	1,127,958

Schedule of Restricted Stock Units Activity

The following table summarizes restricted stock and restricted stock units activity during the nine months ended September 30, 2012:

	Number of Restricted
	Stock Awards / Units
Non-Vested at December 31, 2011		525,889
Granted		—
Vested		(290,105	)
Forfeited		(11,496	)
Non-Vested at March 31, 2012		224,288
Granted		50,000
Vested		(54,415	)
Forfeited		(6,750	)
Non-Vested at June 30, 2012		213,123
Granted		5,014
Vested		(26,414	)
Forfeited		(7,650	)
Non-Vested at September 30, 2012		184,073

Schedule Of Share Based Compensation - Nonemployee

A summary of the total stock-based compensation expense/(benefit) related to share-based awards granted to non-employee consultants, which is included in the Company’s total share-based compensation expense for each respective period, is as follows:

	Three months ended September 30,
	2012		2011
Non-qualified stock options	$	(15,527)	$	(93,836)
Restricted stock awards		13,488		-
	$	(2,039)	$	(93,836)
	Nine months ended September 30,
		2012		2011
Non-qualified stock options	$	14,403	$	10,353
Restricted stock awards		13,488		21,882
	$	27,891	$	32,235