Often the source of a rumor is as important as the rumor itself. Some sources simply have more credibility than others. Reuters has reported that talks to make either Microsoft Corp. (NASDAQ: MSFT) or Yahoo! Inc. (NASDAQ: YHOO) the new owner of Time Warner (NYSE: TWX)'s AOL are heating up.

Now, The Wall Street Journal say that negotiations between Time Warner management and Microsoft brass have become more urgent.

The paper writes, "Microsoft Corp., seeking an alternative to a deal with Yahoo Inc., is planning to meet executives from Time Warner Inc.'s AOL today to advance discussions on a possible tie-up."

Of course, the rumors has the strength of making sense. For Microsoft or Yahoo! to get bigger in display advertising and have more online consumers using their search services, AOL is the only other really large internet property available. And Time Warner management has strongly hinted that it would like to find a home for the portal company.

One thing is certain. Yahoo! will not be AOL's buyer. The likely proposal from Yahoo! would be for it to buy AOL by giving Time Warner a big piece of ownership in the combined company. That would leave TWX with perhaps a third of the public stock in Yahoo. Selling off a stake of that size would be nearly impossible. Time Warner might as well keep AOL under those circumstances. Also, Yahoo! management has been so maladroit at running its own affairs that Time Warner should have very little confidence that the group could run a larger operation.

Time Warner will look at Microsoft as AOL's buyer for two key reasons. First, it has cash; and second, it will not allow AOL to fall into Yahoo!'s hands to give the. No. 2 search company the advantage of improving its position in that part of the online industry.

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

Several media outlets are reporting that Yahoo! (NASDAQ: YHOO) will today reject Microsoft's (NASDAQ: MSFT) offer for the firm as being too low. According to The New York Times, "Yahoo's response is expected to reject negotiations and explain why Yahoo's board believes the current offer price is too low."

The Yahoo! board certainly has guts, but does it have brains? Based on the company's performance last year and the likelihood that it will have only a modest Q1 performance, it is hard to imagine on what basis it can make its valuation case. While the firm may hope it can get a deal with another internet firm, that is far from certain.

Microsoft has indicated that it will lower the price on the deal, but that may give the Yahoo! board more ammunition to make its valuation case. While the company may not be worth more than the $31 offer, a lower offer of, say, $27 might allow Yahoo! to argue that the price is, indeed, too cheap.

Yahoo!'s biggest problem now is the huge distraction that the deal makes for the company's board and senior management at a time when they cannot afford to allow any missteps in the firm's performance.

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

Microsoft Corp. (NASDAQ: MSFT) today reported outstanding third quarter results that handily beat Wall Street expectations.

Net income was $4.29 billion, or 45 cents a share, compared with $3.48 billion, or 35 cents, a year earlier, Sales surged 27 percent to $13.8 billion. Analysts had expected profit of 39 cents and sales of $12.57 billion, according to Thomson Financial. Shares soared over 9% in after-market trading.

Of course, the world's largest software maker, which until now was in Wall Street's dog house, couldn't have been more pleased. "This fiscal year is off to an outstanding start with the fastest revenue growth of any first quarter since 1999," said CFO Chris Liddell, in the earnings release. "Operating income growth of over 30% also reflects our ability to translate revenue into profits while making strategic investments for the future."

So does this mean that Wall Street is now going to get off Microsoft CEO Steve Ballmer's back about the billions the company is spending to catch up to Google Inc. (NASDAQ: GOOG)? Not very likely. One quarter does not make a trend even with its recent deal with Facebook.

But there is plenty for investors to like in the quarter. Vista sales seemed strong and the company hasn't been aggressively cutting xBox prices which has helped profitability, RCM Capital Management's Walter Price told Bloomberg News.

There is one perplexing side to the strong tech results this earnings side. If consumers are so worried about the future, how come they are willing to buy things like the Xbox, Vista and Apple Inc.'s (NASDAQ: AAPL) iPhone. Aren't they worried about housing, energy costs and life in general? Maybe they are so focused on their tech toys that they don't care about the rest of the world. Who knows.

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The tech blogs are buzzing this week with heightened rumors of a Google (NASDAQ: GOOG) phone to be unveiled early next year. While these stories have percolated for months, more details that tend to give the rumor credence have emerged.

Our sister blog Engadget points to Google's acquisition in 2005 of Android, a mobile software firm, and writes that this team has developed a Linux-based (as in, non-Windows) mobile device operating system that it is actively shopping to the industry. The OS would be a direct competitor to Symbian and the mobile version of Microsoft's (NASDAQ: MSFT) Windows.

Crunchgear claims to have inside info that Google is working with HTC, the mobile device manufacturer, to assemble the Google Phone for a 2008 release. It speculates the phone will come equipped with Google Maps, built-in GPS, Google Talk for VOIP, and perhaps WiFi capability. This is especially interesting in light of Google's pursuit of bandwidth in the upcoming 700-MHz auction.

What I find interesting is this progression --

1. Google launches on-line application suite
2. Google expands application suite to off-line use
3. Google unveils its own mobile OS
4. Google launches its own PC operating system

Is that the sound of breaking Windows I hear over my Google phone?

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