Small-cap stocks extended the opening slide after Treasury Secretary Henry Paulson suggested that the government’s initial plan to rescue our fragile financial system by scooping up bad debt off the books of financial firms wasn’t that great of an idea after all. A lack of confidence in the rescue plan simply added to existing jitters about the economy and the corporate profit outlook. Today’s small-cap gainers are Rex Energy (Nasdaq:REXX), CTC Media (Nasdaq:CTCM) and Ticketmaster (Nasdaq:TKTM).

Other Market Watch highlights today included:

• Anything currently linked to Russia is trouble; the Russian Stock Exchange closed for 2 days to stem massive selling in Russian equities.  
• The U.S. dollar was down mildly against the euro, but absolutely tanking against the Japanese yen, losing some 2.1%.  
• Treasury markets rallied as equity markets tumbled, reflecting flight toward “safe haven” outlets and away from stocks.  
• Small caps are down neaerly 4% after Paulson said the govt. would scrap the original “rescue” plan, in lieu of a better alternative.  

Small Cap Gainers:

• Rex Energy trading up over 10% after clocking a profit in Q3 on Nov. 7. See (Nasdaq:REXX).
• CTC Media reports inducement grant under NASDAQ marketplace rule 4350. Shares up 8.4%. See (Nasdaq:CTCM).  
• Ticketmaster Entertainment posts Q3 revenue increase, removes convenience fees for certain concerts. Shares trading up 6% this morning. See (Nasdaq:TKTM).  
• FalconStor Software, Inc. up 5% on higher-than-average volume. See (Nasdaq:FALC).  

Small Cap Losers:

• Wimm-Bill-Dann Foods OJSC tumbled 24% on news that ratings agency Moody’s downgraded the firm’s debt. See (NYSE:WBD).  
• Though crude prices are down, select airlines are struggling. UAL Corp. is down 23%, US Airways is off 20% and Alaska Air is down 7.5%. See (Nasdaq:UAUA), (NYSE:LCC) and (NYSE:ALK).  
• Central European Distribution Corp., the largest vodka producer in Poland, tumbled 21%. See (Nasdaq:CEDC).  
• Hadera Paper Ltd., an Israeli company that specializes in manufacturing and recycling of paper products, was off 20% after reporting earnings. See (NYSE:AIP).  

The Russell 2000 (NYSE: IWM) futures are a hair below the close level on Thursday and the small-cap index will probably open lower.

There is little in the way of economic news today, so stocks will probably be looking for direction. Officials from the U.S. Federal Reserve are set to speak later today and investors will be looking for clues about future monetary policy.

The buyers emerged again on Thursday, lifting the Russell 2000 10.29 to 702.78, just above the 20-day moving average. Key support remains at 688 and 680, but if the latter is breached, the market could slide quickly toward 671. On the upside, resistance comes in today at 712 and 721.

The release of the wholesale inventories data at 10:00 a.m. ET shouldn’t generate much of a response from the stock market, leaving traders time to focus on fundamentals, technicals and election issues into the weekend.

Chinese companies may soon see their raw materials costs drop. According to a report released today by Susquehanna Financial, policy changes enacted in China, effective this month, may cause raw material costs to drop, but might also place upward pressure on labor costs.

Among the policy initiatives the investment bank cites are China’s new labor contract law, lowered import taxes on 45 categories of imported goods, as part of the WTO concessions, and a mandate by the All-China Federation of Trade Unions for 80% of China’s foreign-funded and private enterprises to form trade unions by the end of 2008.

“We view the timing of these events as a one-two punch aimed to raise real wages of Chinese workers, while minimizing the impact to economic growth and unemployment rate by bringing down raw material costs in key industries,” Susquehanna Financial analyst Adele Mao wrote in a research note.

The policies could affect mainland China-based companies in both the near-term and long-term by causing gradual increases in labor costs, while causing raw material costs to fall.

Among the small-cap companies Susquehanna has a “positive” rating on, and for which the policies will probably cause a decrease in raw material costs, but increase in labor costs, include China Fire & Security Group, Inc. (Nasdaq: CFSG), FalconStor Software, Inc. (Nasdaq: FALC) and Comtech Group, Inc. (Nasdaq: COGO).

FalconStor Software, Inc. (Nasdaq: FALC)
Melville, N.Y.
http://www.falconstor.com/

52-week low / high: $7.44 / $15.50
Shares Outstanding:  49.80 million
Market Capitalization:  $652.89 million

In a time of unforeseen need, it’s always good to have backup. For some, it might come in the form of friends, family, or credit. For computer users, it might come from FalconStor Software, Inc. (Nasdaq: FALC), a developer of network storage software designed to store and protect data.

In its 2006 report, Melville, N.Y.-based FalconStor claims that data is growing at an annual pace that sometimes exceeds 60%, basing the statistic on the experience of its customers. That leaves IT departments with a headache as technicians struggle to both store and protect sensitive data and ensure it’s still readily available to insiders.

FalconStor wants to swoop in and provide relief through its disk-based backup services.

It’s had recent success, with third-quarter 2007 revenues increasing 43% to $18.5 million, from $13 million a year earlier. That helped the company lift its pro forma income to $3.9 million or $0.07 per diluted share, compared with a pro forma income of $1.2 million, or $0.02 per diluted share, during the third quarter of 2006. The numbers are before taxes and exclude stock-based compensation expenses.

Annual revenues have been rising steadily, climbing 42.9% from $28.7 million in 2004 to $41 million in 2005, before rising another 34.4% to $55.1 million in 2006. Three analysts polled by Thomson Financial are projecting 2007 revenues of $76.13 million, an increase of 38.2%.

FalconStor’s growing list of clients span the globe. In October the company said that its technology has been deployed by Swiss bank Cornèr Banca SA. The solution was delivered with the help of Sun Microsystems Inc. (Nasdaq: JAVAD), FalconStor’s partner and a provider of network computing infrastructure product and services.

The company is also cultivating a number of business initiatives to increase its footprint in China. On Oct. 25 it announced a joint venture agreement with the Institute of Computing Technology of the Chinese Academy of Science and other parties. The goal is to create a company, to be known as Tianjin Zhongke Blue Whale Information Technologies Co., Ltd., that will produce storage solutions.

Further, FalconStor reported in November that it has entered in an original equipment manufacturer (OEM) agreement with Inspur Group, the largest server manufacturer and solution provider in China.

While it’s too early to tell how these ventures will play out, investors would be wise not to lose the data on this company.

Note: FalconStor Software, Inc. (Nasdaq: FALC) is on the “Watch List” of Rising Star Stocks, a subscription investment newsletter from Business Financial Publishing, which also publishes SmallCapInvestor.com. As a Watch List company, FalconStor displays many characteristics found in successful stock winners, and is being closely monitored for possible inclusion in the Rising Star Stocks portfolio at a later date.

Shares of FalconStor Software, Inc. (Nasdaq: FALC) are higher on news after the close on Thursday that the maker of network storage software swung to a third-quarter profit.

Net income for the quarter ended Sept. 30 more than quadrupled to $6.3 million, or $0.12 per share, compared with a net loss of $1.3 million, or $0.03 per share, during the same three months of 2006. That result beats the consensus estimate of earnings of $0.06 per share, according to a poll of three analysts by Thomson Financial.

Revenues for the period increased 43% to $18.5 million, from $13 million a year earlier. Wall Street was calling for the Melville, N.Y.-based company to book revenues of $17.99 million.

“We are pleased with the consistent expansions of our product portfolio, strategic partners, sales channel and operating margins,” said chairman and CEO ReiJane Huai in a statement.

At 11:37 p.m. ET, shares of FalconStor Software, Inc. (FALC) were up $0.90, or 7%, to $13.24. That’s near the 52-week high of $14.35, which was reached on Oct. 8. The 52-week low of $7.11 was set on Nov. 13.

The Russell 2000 (NYSE: IWM) futures are rising and the small-cap index is set for a bullish opening on positive earnings news.

Microsoft Corp. (Nasdaq: MSFT) reported after the close on Thursday that its first-quarter earnings beat analysts’ expectations due to strong sales of the videogame “Halo.”  The Redmond, Wash.-based also raised its outlook for the full fiscal year.

Contributing to the upbeat sentiment is troubled mortgage lender Countrywide Financial Corp. (NYSE: CFC), which announced that it will return to profitability in the fourth quarter. The New York-based company also reported a third-quarter net loss, its first in 25 years.

Like other mortgage lenders, Countrywide took a hit this summer due to the meltdown in the subprime mortgage sector.

Here are the biggest percentage gainers and losers in pre-market trading among companies with a market cap between $100 million and $750 million:

Biggest percentage gainers:

• Sierra Wireless Inc. (SWIR), up 14% on news of higher third-quarter earnings.
• FalconStor Software Inc. (FALC), up 11% on news of a strong third-quarter.
• Ikanos Communications Inc. (IKAN), up 11% despite news of a wider third-quarter loss.

Biggest percentage losers:

• Trident Microsystems Inc. (TRID), down 28% on news that quarterly financial results missed expectations.
• Online Resources Corp. (ORCC), down 19% on news of fourth-quarter guidance below projections.
• LSI Industries Inc. (LYTS) down 16% on news it did not provide a guidance for fiscal 2008.

Shares of San Antonio-based MDI, Inc. (Nasdaq: MDII) are falling despite news after Thursday’s close that the security technology solutions company has received the first of several purchase orders from a U.S. naval support center located in Europe.  Shares are down $0.33, or 17.56%, to $1.55.