The Vonage (NYSE: VG) saga continues. Douglas McIntyre reported recently of a "sucker rally" in Vonage stock as Vonage tried to fight off a patent lawsuit brought against the company by Verizon (NYSE: VZ). Friday brought with it a refusal of an appeal made by Vonage and slapped the voice-over-IP telephony firm with a $120 million lawsuit.

Legal costs have hurt Vonage and may increase its risk of bankruptcy. The company said that it may not have enough money to pay $253.5 million in debt due as early as December 2008.

The firm had a first-move advantage and created an innovative service. Unfortunately, the legal issues and commoditization of voice-over-IP technology has severely hampered the prospects for the young company. I would expect the company and its customer-base would not be a standalone business a year or two from now.

Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC., the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Author holds no positions in the stocks mentioned above.

Morgan Stanley (NYSE: MS) joined a growing list of financial companies in booking losses on subprime mortgage- related assets and said the outlook for credit markets is bleaker than in September. Morgan Stanley said it lost $3.7 billion in the two months through Oct. 31. After dropping over 6% yesterday, MS shares are gaining over 4% in premarket trading.

Ford Motor Co. (NYSE: F) shares are gaining around 5% in premarket action. The second-biggest U.S. automaker reported a third-quarter loss that narrowed to $380 million after it managed to lower costs through plant closings and job cuts. Excluding one-time costs, the company lost $24 million, or 1 cent a share, beating analysts expectations of a loss of 47 cents, according to Bloomberg.

Luxury home builder Toll Brothers (NYSE: TOL) issued preliminary fourth-quarter results this mornings, showing a sharp drop in the number of new homes sold. As buyers canceled orders for more expensive homes, Toll also saw a deep plunge in the average price of the home it was able to sell.

Vonage (NYSE: VG) settled its big patent dispute with Verizon (NYSE: VZ). After hours yesterday, shares in the VoIP pioneer were up over 70% to $2.61.

According to The Wall Street Journal, "Vonage agreed to pay Verizon either $80 million or $117.5 million, depending on the outcome of a decision by the U.S. Court of Appeals for the Federal Circuit." The company has settled a suit with Sprint (NYSE: S) and has another legal fit pending over patent matters with AT&T (NYSE: T).

The rally in the stock misses the point that Vonage is still losing a lot of money and its cash balance drops with each settlement. At the end of the June quarter, the company had $275 million. But, operational deficits and settlements have probably cut that considerably. Vonage had an operating loss of $33 million during that quarter.

The market is also moving away from Vonage. Fiber products from the large telecom companies are encouraging customers to stick with them by offering the "triple play" of TV, voice, and broadband. Cable stock prices have been pulled down sharply by the ability of old line phone companies to offer competing service. So Vonage may no longer have an easy leg up in taking customers from traditional land-line users.

Vonage is facing the classic problem of the small innovator. The market has been able to copy its services and bleed off its cash. The company may not be around in a year.

Douglas A. McIntyre is an editor at 247wallst.com.

Main market news here: Microsoft's upbeat earnings should boost techs

Vonage Holdings (NYSE: VG) shares climbed in after-hours trading on news the internet phone company has agreed to settle its lawsuit with Verizon Communications (NYSE: VZ). Vonage will pay as much as $120 million to end the patents-infringement case.

In its pursuit of BEA Systems (NASDAQ: BEAS), Oracle Corp. (NASDAQ: ORCL) has rejected as "impossibly high" a $21-per-share counteroffer from BEA's board of directors. Oracle is firmly standing by its original $17 bid, saying the offer will expire Sunday evening.

The Wall Street Journal is reporting that Macy's (NYSE: M) will be the exclusive department store retailer of Tommy Hilfiger sportswear beginning next fall. Tommy Hilfiger is held by Apax Partners.

Vonage Holdings Corp. (NYSE: VG) continues to pay big bucks to settle patent infringement cases.

The Internet phone company today settled its long-running dispute with Verizon Communications Inc. (NYSE: VZ). In March, a jury awarded Verzion $58 million and issued an injunction that basically would have forced Vonage out of business. That decision was upheld by the U.S. Court of Appeals for the Federal Circuit.

Vonage will pay Verizon up to $117.5 million, depending on the outcome of pending appeals, the Holmdel, NJ-based company said in a statement. It will also give $2.5 million to charity. This settlement isn't surprising. Patent litigation is really expensive and takes forever to wind its way through the courts which is why companies are eager to settle these cases before trial.

Earlier this month, Vonage settled a patent dispute with Sprint Nextel Corp. (NYSE: S) for $80 million. It faces a separate legal action from AT&T Inc. (NYSE: T). With all of these huge companies wanting a piece of it, it's a wonder that Vonage is still standing.

Absent the patent issues, Vonage's future remains bleak. It competes to offer what is basically a commodity service against much larger rivals. Once these patent cases are settled, my suspicion is that one of them will try to snap up Vonage while the stock continues to trade well-under its $17 IPO price. It closed today at $1.53.

Deaths come in threes and the latest lawsuit against Vonage Holdings Corp. (NYSE: VG), the VoIP pioneer, may just put it under. It is the third such suit by a major telephone company.

Vonage has now lost or settled patent infringement suits brought by Verizon Communications Inc. (NYSE: VZ) and Sprint Nextel Corp. (NYSE: S). Each loss has brought a one time payment and royalties on future revenue.

An SEC filing by the VoIP company disclosed that an action has been filed buy AT&T Inc. (NYSE: T), which accuses Vonage of "violating a single patent that lets users access an Internet phone system using a standard phone device," according to The Wall Street Journal.

Vonage opened at $17 on its IPO in 2006. The stock is lucky to hold $1 now. And, the AT&T suit may be the end of the line. In the June quarter, the company had an operating loss of $33 million on $20 million in revenue. The company's cash was down to under $350 million.

It is Chapter 11 time for Vonage. One of the large cable companies would probably be willing to pay enough for the company to pay off lawsuits and, perhaps, leave a few pennies for the shareholders.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Vonage Holdings Corp. (NYSE: VG) has escaped the hangman's noose for now, settling a patent dispute with Sprint Nextel Corp. (NYSE: S) for $80 million that threatened to sink the company. Shares of the Internet phone service provider surged on the announcement.

Hold the applause for a second.

Remember, the Holmdel, NJ company recently was ordered to pay $58 million with Verizon Communications Inc. (NYSE: VZ) to settle another paent dispute. Though the company say it can "work around" the disputed patents, it has other serious problems.

The company is locked in a competitive struggle against much bigger competitors such as Verizon and Comcast Corp. (NASDAQ: CMCSA) that over time it will lose even as more telephone service migrates to the Internet. Yes, I know Vonage has a cadre of customers who are just crazy about it and even liked those annoying commercials that thankfully have disappeared but I don't see how the company will survive over the long term.

Vonage (NYSE:VG) needs to get a new patent attorney. It has already lost a very large case IP to Verizon (NYSE:VZ). And, earlier today, Sprint (NYSE:S) won a claim against the VoIP company covering six patents.

Vonage's stock fell 33% in just a couple of hours. It was already near a low. After bottoming at $1.20, it closed at $1.30. The stock traded around $17 after the company's IPO in May 2006.

According to The Wall Street Journal, the jury in the case ruled that Vonage would have to pay Sprint $69.5 million in damages. That amounts to a royalty of about 5% of the revenue over the time that the six patents were infringed upon.

When Vonage lost the Verizon case, the damages were $66.5 million and 5.5% of revenue paid as a royalty going forward. At the end of the last quarter, Vonage had over $340 million in cash.

At the current pace, Vonage can lose three more suits like this, if it runs the company as a break-even.

Douglas A. McIntyre is a partner at 24/7 Wall St.

MOST NOTEWORTHY: The process control sector, R.H. Donnelley, Vonage, Coca-Cola Enterprises and Transocean were today's noteworthy downgrades:

• Baird reduced estimates across the board in the process control sector due to lower expectations for North American industrial and residential construction. The firm downgraded Roper Industries (NYSE: ROP), Regal-Beloit Corp (NYSE: RBC) and Baldor Electric (NYSE: BEZ) to Neutral from Outperform and AO Smith Corporation (NYSE: AOS) to Underperform from Neutral.
• Goldman downgraded shares of R.H. Donnelley Corporation (NYSE: RHD) to Neutral from Buy after the company updated its 2007 guidance to reflect deteriorating trends in local advertising.
  
• Vonage Holdings Corp (NYSE: VG) was downgraded to Sell from Hold at Soleil due to liquidity concerns.
  
• Coca-Cola Enterprises (NYSE: CCE) was downgraded to Hold from Buy at Deutsche Bank on valuation and mixed near-term trends.
  
• Transocean Inc (NYSE: RIG) was downgraded to Hold from Buy at Gabelli. Even though the deepwater market continues to be strong, the firm is concerned regarding the continuing weakness in the jackup market as well as the limited upside potential due to the company's ships being in use through 2009.

OTHER DOWNGRADES:

• XM Satellite Radio Holdings (NASDAQ: XMSR) and Sirius Satellite Radio Inc (NASDAQ: SIRI) were downgraded to Neutral from Buy at UBS.
  
• Blue Nile Inc (NASDAQ: NILE) was downgraded to Neutral from Buy at Suntrust.
  
• Citigroup downgraded shares of CheckFree Corporation (NASDAQ: CKFR) to Hold from Buy.
  
• Morgan Stanley downgraded McAfee Inc (NYSE: MFE) to Underweight from Equal Weight.

More and more businesses are finding that it can pay to outsource their telephone and Internet customer interface requirements to firms set up to efficiently handle such functions. One such outfit is headquartered in Los Angeles, but operates from shops overseas.

PeopleSupport (NASDAQ: PSPT) provides business process outsourcing (BPO) services from facilities in the Philippines. Company personnel handle customer service calls, technical support questions, marketing campaigns and collections. The firm also transcribes voice recordings and captions television content. Services are offered via telephone, e-mail and Web chat. Expedia (NASDAQ: EXPE) and Vonage Holdings (NYSE: VG) are major customers.

The firm surprised the Street earlier in the month, when it reported Q2 EPS of 16 cents and revenues of $34.3 million. Analysts had been expecting 2 cents and $31.6 million. The CEO cited increasing demand and improved operational efficiencies for the solid results. Management also issued in-line guidance for Q3/FY07 results and announced a $25 million stock buyback. Piper Jaffray subsequently upgraded the shares to "outperform" and four other brokerage firms reiterated "buys."

Shares of Vonage Holdings Corp. (NYSE: VG) have soared almost 13% after reporting better-than-expected second quarter results. Shareholder should enjoy the ride because it won't last.

Vonage had a net loss in the quarter of $34 million, or 22 cents per share, narrower than the $74 million, or $1.16 per share, a year earlier. Excluding one-time items, the loss was $18 million or 12 cents, better than the 34-cent average estimate of analysts surveyed by Thomson Financial. Revenue rose 43% to $206 million, missing analysts' expectations by about $2 million.

But hidden beneath these numbers are some troubling trends.

For one thing, Vonage has lost a major patent battle to Verizon Communications Inc. (NYSE: VZ). Though Chief Executive Jeffrey Citron sai that the company is working around the disputed patents, investors should realize that the court's opinion on that question is what matters not his.. But even if Vonage wins the patent case on appeal, it still must compete on price against much larger companies including Verizon. That's a fight that it can't win.

Then there's the slowdown in customer growth in the quarter and the rising churn rate. Interestingly, the churn rate was HELPED by 20 basis points because it extended the grace period for customers to pay their bills. For months, Vonage has claimed its working to improve customer service which for some bizarre reason was lauded by PC Magazine.

Looks like Citron is hoping for his own break from investors who have sent the stock of the Holmdel, NJ-based company down more than 60 percent this year. Perhaps, he's also hoping for a break from a rival or a private equity company to buy him out.

I still think Vonage is a dog that investors should avoid.

When companies discontinue operations it's one thing, but when a company ceases operations without warning its customers something is fishy. When SunRocket did just this, red flags appeared in my head. Companies don't just close their doors one days for no reason, but it appears that SunRocket did just this:

"At the company's Tysons Corner headquarters, the phones went unanswered, the doors were locked and a cardboard sign with "Out of Business" scribbled on it hung inside the glass front door."

Obviously consumers who used the company's services were out of luck for the day, but it didn't stop there. In fact, many of these consumers paid for their services well in advance.

Although this seems like an isolated event, it casts further doubt on the entire VoIP industry. As a result, the primary VoIP provider in America, Vonage (NYSE: VG) is likely to lose some (more?) credibility. That being said, for many consumers the benefits VoIP offers over traditional phonelines are powerful enough to let them "roll the dice" once again. Some followers of this space who I spoke to are going as far as to say this could help Vonage because they will gain some of SunRocket's business, but I'm not sure about that and the impact wouldn't be significant because SunRocket's total customer base was about 10% of Vonage's current customer base.

However, if 8x8 (NASDAQ: EGHT) could pick up SunRocket's accounts, the stock would most certainly fly because of its small size - $82 million - and 8.7 short ratio.

Over the past couple years, VOIP phone companies have been big spenders for online advertising. It was the right target market – but not cheap. Competitors essentially bid up the prices.

Well, things may moderate. According to a report in the Wall Street Journal [a paid service] and The New York Times, VOIP provider, SunRocket, has shut down its operations.

Funny enough, if you surf the Net, you will still see lots of SunRocket ads. So, I guess the company still needs to take some cleanup actions.

The firm got its start about three years ago and quickly attracted venture capital from firms like Doll Capital Management, BlueRun Ventures and the Mayfield Fund (which, of course, will now have a write off).

Even at that time, things looked dicey for VOIP providers. Vonage Holdings Corp. (NYSE: VG) had a strong presence in the market and there was lots of competition from traditional players, like Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T). Of course, there was competition from cable players.

What's more, it appears there are outages at SunRocket, which is certainly a big hassle for customers.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Zac Bissonnette posted earlier how Moody's Corp. (NYSE: MCO) criticized private equity. What strikes me is just how late Moody's is to join the critical chorus.

Roughly 11 months ago I made arguments similar to the ones that Moody's is making today. And I was pleased that some media outlets -- specifically Barron's Alan Abelson -- picked up on them. What really got me going is that as of August 2006, there were two busted IPOs from which Bain Capital -- as the Boston Globe reports enriched presidential candidate Mitt Romney -- took enormous fees:

• Vonage Holdings Corp. (NYSE: VG) - Bain Capital and others lent Vonage $200 million before taking this money-loser public. VG has lost 80% of its value since the May 2006 IPO.
• Burger King Holdings, Inc. (NYSE: BKC) - That same month, Bain Capital and others took a $30 million "management termination fee" out of Burger King before taking it public. (This fee is chump change compared to the $367 million dividend Bain Capital and its partners extracted from Burger King in February 2006.) By August 2006, Burger King had tumbled 26% since its IPO after announcing that it lost $9 million in its fiscal fourth quarter due, in part, to the management termination fee. Fortunately for its shareholders, the stock has doubled since then.

It takes a long time for a battleship the size of private equity to turn. But when Moody's -- which is supposed to be protecting the public from poorly structured debt rather than profiting from it -- kills its formerly golden goose, the time for turning may be closer than it was a year ago.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.

I just flew in from the 2007 Consumer Electronics Show where I declared my 2007 Consumer Electronics Best of Show Winner to be Vonage (NYSE: VG). Well actually, I just got my butt off the couch and stepped over to my computer after watching the HGTV presentation from the show. After close examination of all the gadgets presented -- and I know the show only revealed a fraction of them -- and based on what I saw, the Vonage V-Phone walked away with Best In Show honors for utility, creativity, ease of use and consumer value.

The Vonage V-Phone is an amazing little device which for a paltry $40.00 plus a monthly service fee (contact Vonage for details), allows you telephone access via any PC or laptop on the planet which sports a USB port. What makes the Vonage offering so exciting to me is that anywhere in the world you are, your callers can contact you by using your local home or business phone number, direct dialed.

The Vonage V-Phone has 250MB of on board flash drive memory which can be used to store files, MP3 songs, digital photos or any other manner of digital data. Vonage states that the unit loads quickly and automatically without the need for any software because the V-Phone comes with Vonage Talk software already preloaded. You simply slip the thumb sized unit into any available USB port connected to high-speed Internet, plug the included earpiece microphone into the side of the little V-Phone and you're making and receiving calls anywhere on the planet. The unit also comes with a standard size key ring already attached!

Gary E. Sattler has no financial interest in and is not compensated by Vonage.