By Scott Moritz

Three of tech investors’ favorite horses - Google (GOOG), Research in Motion (RIMM) and Apple (AAPL) - which led the stampede out of the Nasdaq Monday, came rushing back a bit Tuesday.

Panic sellers who sent the Nasdaq down 9%, its steepest one-day drop since the Internet bubble burst in 2000, were replaced by bargain hunters Tuesday. In mid-day trading Google shares were up 8% and RIM’s stock bounced 10%. Apple was up 5%, while the Nasdaq as a whole rose 3%.

Apple was one of the biggest losers Monday, falling18% after two analysts downgraded the stock on fears that Mac sales were going the way of the rest of the PC market. FORTUNE’s Philip Elmer-Dewitt, however, pointed out that some of the gloomy predictions were based on a survey of business IT buyers, not quite Apple’s core market.

Other analysts came to Apple’s defense Tuesday. Goldman Sachs’ David Bailey reiterated his buy rating  saying the stock was oversold.

“We think yesterday’s 18% decline more than captures the concerns over Mac growth in a weakening spending environment, making Apple shares attractive at current levels,” Bailey wrote.

Monday’s broad selloff, and in particular the Nasdaq’s plunge, kicked into high gear after lawmakers failed to pass a Wall Street bailout bill. Amid fears that the current credit crunch could push the economy into a deep recession, not even the tech sector’s lack of debt and strong cash position were enough to keep panicky investors from bailing.

Tuesday’s rebound offered some solace, but as Monday’s collapse showed, tech is along for Wall Street’s ride, like it or not.

By Jessi Hempel

The charity smackdown was intense – and attracted some of the biggest stars of the blogosphere. Michael Arrington of TechCrunch offered to match reader donations. If he won, Fred Wilson, a renowned New York venture capitalist and author of tech blog avc.om, promised to give the grand prize – a lunch with Yahoo’s (YHOO) Jerry Yang – away to a reader (quipped Arrington: “Fred Wilson must be stopped.”). And Allthingsd.com’s Kara Swisher videotaped her two young kids asking for cash.

In the end, an obscure blog called TomatoNation left them in the dust. With just 100,000 readers, author Sarah Bunting raised more than $100,000 in donations. In all, the site that hosted the contest last year, DonorsChoose.org, raised $420,000 to help fund education.

Now comes the second philanthropic showdown. Starting Oct. 1, bloggers will compete to raise funds for DonorsChoose.org, which lets donors school projects to fund. Arrington, Wilson and Swisher are back in the ring along with Net celebrity Julia Allison (nonsociety.com), former Microsoft tech evangelist Robert Scoble (Scobleizer.com), and a host of others. It’s not just A-listers, though. Any blogger can join, and as Bunting demonstrated, sometimes a small group of passionate people can outgun a massive audience.

As media sponsor, Fortune will keep you updated on who’s ahead - and what crazy and creative tactics bloggers are using to raise money.

There’s a good reason techies love Donorschoose.org. As Fortune wrote in February, the site is part tech and part business with a strong do-gooding bent. Started by former teacher Charles Best in 2000, it has grown from a New York City experiment to an efficient alternative funding source for teachers nationwide.

Here’s how it works: teachers register with the site and upload projects they want sponsored. Recent examples include podcast equipment for a high school journalism class in Newton, Kan. ($582 needed), basic art supplies like paint and magic markers for a fourth-grade class in Brooklyn ($370), and a bass guitar for an after-school music program in Los Angeles ($723). DonorsChoose acts as the middle man, purchasing the materials and shipping them and a disposable camera to the teachers who made the requests. (Donors later receive thank-you notes from the students along with photos.)

Last year, with the help of an $11 million “investment” (read: donation) from Web heavyweights like eBay (eBay) founder Pierre Omidyar, Yahoo cofounder David Filo, Silicon Valley venture capitalist Vinod Khosla and Netflix (NFLX) founder Reed Hastings, the site moved beyond a dozen or so states and geographic areas to offer services to every school in the country. So far, Donorschoose.org has raised $24 million to get support to 1.4 million students in 50 states. Nearly 60,000 projects have been funded. And that’s only the beginning of Best’s vision for the organization.

Here’s where you come in. Starting Wednesday, check out the Blogger Challenge on Donorschoose.org/bloggers. Make a donation – and help your favorite blogger win. Or if you’re a blogger yourself, join the challenge, and see if you can best the blogging A-list in your fundraising. The winner gets a good old-fashioned dose of media attention, a priceless prize for any blogger.

The competition is bound to get rough, and hilarious. Here at Fortune.com, we’ll keep you updated on Techland.

By Scott Moritz

Apple (AAPL) got hit with a pair of downgrades Monday as analysts see a weaker consumer taking a big bite out of the computer-maker’s growth rate.

RBC and Morgan Stanley analysts slapped Apple with neutral ratings, down from buy, on concerns that the slumping economy will put a chill on sales of Mac notebooks and desktop computers.

Citing a IQ/Changewave survey, RBC noted that 40% of consumers questioned said they “plan on spending less on electronics in the next 90 days,” RBC analyst Mike Abramsky wrote in the note. This is the weakest outlook ever measured in these surveys, Abramsky wrote.

Apple shares fell 16% in morning trading Monday in the wake of the reports, as investors get a sobering view of how popular consumer devices can lose momentum in a faltering economy.

The growing credit crisis has helped deflate consumer confidence and force delays in purchases of items like new computers and flat-screen TVs. The problem for Apple, writes Kathryn Huberty in a downgrade of Apple to neutral Monday, is that not only is PC sales growth slowing but the one area shrinking less is the under-$1,000 price range where Apple is absent.

Add the slowdown in PC sales to the higher costs of iPhone production, and Huberty says there will be a dramatic drop in Apple’s profit growth. Huberty cut her Apple earnings growth projection for the year to 6%, well below the 9% analysts’ consensus average.

Apple is not recession proof, RBC’s Abramsky writes.

Not surprisingly, investors have taken flight from stocks in some of the stronger players as the market jitters spread across nearly all sectors. Apple shares are down 35% and smartphone rival Research in Motion (RIMM) is down 47% in the past month.

RIM’s disappointing outlook Thursday confirmed that the once hot smartphone segment is cooling just as the larger mobile phone market grinds into slow gear, not just in the U.S., but globally as Nokia (NOK) recently pointed out.

By Yi-Wyn Yen

The Google-Yahoo search advertising pact will get approval from the Department of Justice in the next few weeks, but not without some serious scaling back of the deal, according to one analyst.

Thomas Weisel Partners managing director Christa Quarles expects the Justice Department to put limits on how often Yahoo will be allowed to run Google’s (GOOG) ads on Yahoo’s web properties. Yahoo’s revenue-sharing agreement gives the Internet portal flexibility on the number and the type of Google ads it can show. Quarles predicts that the Justice Department will not trust Yahoo enough to give it that much freedom.

“The DOJ will put some caps on how much Yahoo can move over to Google,” Quarles says in an interview.

Google and Yahoo (YHOO) plan to start the partnership in October. The pair gave the Justice Department 3.5 months to review the agreement for antitrust concerns after striking a deal on June 12. Any restrictions on the deal that the government wanted could either be accepted by the companies or not, in which case the feds would have to decide whether to pursue court action. The department has reportedly hired Sanford Litvak, a top litigator, to head up any case.

The agreement the companies struck allows Yahoo to use Google’s technology to display Google’s ads alongside Yahoo’s search results. The search giant will pay Yahoo a portion of the revenues it gets over four years. Yahoo will have the option to renew the deal in two straight three-year terms. Industry analysts estimate Google gives its AdSense partners 80% of search revenue, and that Yahoo will get a similar arrangement.

For the month of August, Google controlled 63% of the search traffic in the U.S and Yahoo owned 20%,  according to comScore.

Yahoo is vague about exactly how often it will turn to Google’s search-ad engine to supply results on a Yahoo page. But executives insist they plan to run Google’s ads only when Yahoo has low ad inventory, especially in “long-tail” searches such as “red roses in Birmingham, Ala.”  Yahoo says that the Google partnership can increase annual revenue by $800 million, or 11%.

Quarles argues that the feds will want to put more limits on the deal to keep Yahoo from becoming addicted to Google. “Let’s say Yahoo starts with long-tail queries. Then they start turning up the dial to include the retail segment. And then it’s, ‘Ooh, my. We can double monetization.’ There’s a very high temptation for Yahoo to shift over to Google,” Quarles says.

The ad partnership has received criticism from powerful interest groups such as the Association of National Advertisers and the World Association of Newspapers. Advertisers say they fear the combination of the top two search engines will drive up the prices they pay for search keywords. Newspaper publishers worry that the combined forces of Google and Yahoo will reduce competition and ultimately lead to less revenue and higher fees for them.

Both Google and Yahoo insist that competition will get better as the tarnished Internet portal invests the additional money to improve its search ad system.

Quarles predicts that Yahoo will make far less than the $800 million the company says it can.

That’s not good news for investors who saw a buyout from Microsoft (MSFT) as a better alternative to the Google pact. In a June note to clients, Quarles wrote that Yahoo’s revenue opportunity for the first year will be between $313 million and $563 million. She speculates that Yahoo will outsource no more than 15% of its search ads to Google.

She says now that based on her market research and conversations with Yahoo insiders, the feds will likely limit the agreement in a way that keeps Yahoo’s take to her estimates.

By Scott Moritz

Ned Hooper, head of Cisco’s (CSCO) consumer business has a big challenge: Find new sales for a technology that’s reached its limit.

As the top seller of home Wi-Fi routers – those Internet-connected boxes that broadcast wireless signals throughout your house – Cisco needs a big new innovation now that the market is saturated.

Hooper’s solution: A network application that will control the connections to a variety of hardware devices. The aim is to make home communications networks more manageable, and keep Cisco on the forefront of key trends like digital media delivery, and of course, social networking. Think: YouTube to your TV, iPod tunes to your in-home sound system, MySpace on your GPS device, etc.

As an executive on Cisco’s M&A strategy team, Hooper helped the company acquire Linksys, the No.1 home router maker, in 2003. Other notable acquisitions under his watch include set-top box maker Scientific-Atlanta and video teleconferencing specialist WebEx. In June, Cisco acquired Pure, a home networking software developer. That purchase has given Hooper more of the tools his team needs in its home networking management platform Cisco calls LELA, short for Linksys Easy Link Advisor, which will debut at the Consumer Electronics Show in January.

The shift by the San Jose networking hardware giant toward a software approach is a significant move toward “owning the engineering,” Hooper said during an interview Wednesday.

The LELA system requires electronics makers like Sony (SNE), Apple (AAPL), Samsung, Dell (DELL) and Hewlett-Packard (HPC) to install compatibile software so their devices can talk to the network. Hooper calls it a partnership process that would support free licensing of an open standard application. In theory, TV, laptop and phone makers will feel compelled to add the software to their products in hopes consumers will gravitate to the networked capabilities.

Hooper says stay tuned for some partnership announcements on this front.

The LELA system will also give owners a picture of all the devices connected to their network, including those that may not be authorized. And through a WebEX application, Cisco can offer live technical assistance if people need help with tasks like syncing their router to their PC.

Sounds huge, certainly, but will people buy it?

Probably not, says Telecom Pragmatics analyst Mark Lutkowitz.

“People don’t want to manage networks, they just want to flip a switch,” says Lutkowitz. “Multimedia home networking has yet to takeoff. That’s true not just for Cisco, but for others as well.”

To some degree, Cisco’s aim is to offer an elegant solution to a problem that may not require these high-level refinements. For example, there are simpler devices like Slingbox that send TV programs to PCs and phones. And Roku, for instance, transmits Netflix (NFLX) video from the Internet to your TV. Even more simple perhaps are HDMI cords that physically connect PCs to TVs for high-definition media viewing.

The demand for sophisticated new network management systems may not be enough to offset the inevitable slide in Cisco’s home router sales.

“The product line has reached the point where everyone has a box,” says David Gross, also with Telecom Pragmatics. “Cisco hopes the new applications will allow them to maintain the prices on these Linksys boxes. The problem,he says, is that the box has been upgraded to the point were it does everything people asked it to do – provide big bandwidth.”

For all those of you waiting for the news-as-popularity-contest site Digg to get bought by Google (GOOG), Microsoft (MSFT), CBS (CBS), or (insert your favorite rumored media company here), looks like you will have to wait. Digg is announcing a $28.7 million venture capital round today, led by Waltham, MA-based Highland Capital and with return appearances by prior investors including Greylock Partners, Omidyar Network and SVB Capital. The round brings the total capital raised by the company to $40 million over three rounds.

Digg is one of those original Web 2.0 companies that, now four-years-old, has been rumored to be in talks with just about every plausible acquirer. Whether it was the price – widely discussed as between $200 and $300 million – the business, or both, no one pulled the trigger on a deal that suited both sides. Digg CEO Jay Adelson wouldn’t comment on any of the past rumored deals, but made it clear that the present round of funding gives Digg a war chest to super-charge growth and the value of the company. “My investors expect an ROI at some point,” Adelson says. “The plan we presented from the beginning was many year, and involved the kind of international growth and world domination that we are going after with this round. We would be leaving a lot of cash on the table if we didn’t fulfill that opportunity.”

The cash will be used to double the number of employees at San Francisco-based Digg by the end of the year, Adelson says, to better roll out features and expand agressively around the world. About 40% of Digg’s traffic, some 30 million unique visitors a month according to the company, already comes from folks outside the United States.  One of the issues Digg faces is there have been clones of the company’s service around the world, which allows users to suggest and vote stories to the top of the online site’s news pile, or bury them at the bottom. Putting the service into different languages, and pushing it into new regions ought to give’s Digg’s growth a big boost, but the company needed the funding to do it quickly. “There is getting there, and getting there with gusto,” Adelson says. “This is the rocket fuel the company needed.”

The privately-held company does not make revenue figures available. Adelson says revenue from the ad-supported service tripled this year. While it is not profitable yet, it was on the path toward cash-flow break even, Adelson says. “It’s not that this round of funding was critical to getting to profitability,” he says. “Before this round we were fully-funded.”

In raising a large round for the Web 2.0 company,  Adelson says DIgg was influenced by other Web 2.0 startups like Slide and Ning that both raised very hefty rounds earlier this year. “We all agreed that the opportunity for raising capital was a 2008 thing,” Adelson says. “If you are going to try and raise capital, do it this year.

“There is no question we are going to have some degree of a downturn in the next couple of years, if you have the opportunity to invest money and grow your business in times like that, it’s a great time to go out and conquer while the other guys are hurting. How much do you need to get through the times ahead? The number we raised is $28.7 million. It’s more than enough to get us through any downturn.”

By Yi-Wyn Yen

It’s been four months since Microsoft introduced its cashback rebate scheme that pays people to use its Internet search service. But Microsoft continues to fall behind Google in search.

On Wednesday, Microsoft (MSFT) plans to unveil a new rewards program to get more consumers searching on the company’s Live Search engine. While a company spokesperson would not discuss details of the latest rewards gimmick, a Microsoft executive says the promotion is designed to generate user loyalty and more searches on Live.

The program gives consumers a discount every time they use Live Search to find and buy a product like a digital camera. The company is banking that as more people spend time on Live, the more advertisers will promote their products, and Microsoft will grab a bigger piece of the paid search market.

So far, cashback does not appear to be helping the company’s search efforts. For the seventh straight month, Google (GOOG) widened the gap with MSN’s Live Search. The search king extended its lead to 63% in August while Microsoft dropped to 8.3%, according to comScore’s latest monthly report for U.S. traffic. For the first two months of the third quarter, MSN Live Search has lost 14.4% of its traffic from year-ago levels.

A Microsoft executive says comScore’s figures do not accurately reflect how well the cashback program is doing. “Those numbers don’t seem right to me. We just had our highest month ever [for unique visitors in August],” says Brad Goldberg, Microsoft’s general manager for search.  “There is always going to be volatility with monthly metrics. Cashback is a long-term bet.”

ComScore’s numbers represent the total number of searches, not the number of users. Goldberg says the company is pleased with cashback’s progress though he would not reveal the number of transactions made or how many people that have enrolled in the program.

The cashback promotion is part of Microsoft’s broader goal to combat Google’s ever-growing share of the online ad market. The program marks Microsoft’s first major initiative to grow search traffic since the company ended talks with Yahoo (YHOO), the No. 2 search engine that owns roughly a fifth of the U.S. search market.

Goldberg hints that the company plans to offer consumers even more savings leading up to the holiday season. “We look at traffic, different tactics, and ways of execution… and we’ve learned that the higher the rebate [we offer], the better,”  Goldberg says. “I’m not joking. EBay’s a good example. They have a relatively high rebate level in the 20%-30% range and they had a big increase in traffic as a result.”

Analysts say that Microsoft needs more advertisers to join the cashback program to attract more consumers searching on Live. Cashback has enrolled than 700 merchants, including eBay (EBAY), Hewlett-Packard (HPQ), and Overstock.com (OSTK).

“Our assessment is that MSFT is gaining supply side traction with advertisers and if that remains sustainable, they should eventually gain traction with end users (traffic) as well,” writes Sandeep Aggarwal, a senior Internet analyst with Collins Stewart, in an e-mail to Fortune.

Microsoft, with its deep pockets, may be committed to cashback for the long haul, but industry observers say the company needs to produce results soon.

Search marketers put a January expiration date on Live’s cashback program. “The whole value of cashback is tied to the retail season,” says John Tawadros, the chief operating officer of search marketing firm iProspect. “I would think advertisers are thinking about it now and looking at adopting cashback to differentiate themselves with the competition. After the holiday season would be a perfect time to assess if this has taken off or not.”

By Scott Moritz

NEW YORK – A brief hands-on experience with the Google (GOOG) G1 phone gives the impression that after a slew of touchscreen duds from other telcos, Apple’s (AAPL) iPhone finally has a worthy rival.

The highly-anticipated HTC phone for T-Mobile (DT) was unveiled in New York Tuesday, and kiosks with technical experts were set up so media people could run the first Android-powered phone through some tricks. T-Mobile will start selling the phone Oct. 22 for $179 with a two-year contract.

The G1 has a large touchscreen, nearly the same size as the iPhone. But unlike the iPhone, there is a physical keyboard under the slide-open screen. People familiar with the iPhone will find the G1 a little lighter and thicker. The G1, for you ultra-thin fans, is about 3/4 of an inch thick, downright portly compared to the svelte half-inch iPhone.

Navigating the screen is fairly easy and there are several ways to move around. The touchscreen has a swipe capability that allows you to flick up and down or side to side. There is also a small trackball-type button at the bottom of the phone for scrolling.

The 3G network coverage at the show – only 16 cities currently have T-Mobile’s 3G networks – was fast. Google’s homepage loaded in five seconds and Google search results also popped up in five seconds. Sites like CNNMoney and Fortune took about 17 seconds to load. That is a fairly standard 3G speed.

Calls worked, and the sound was clear, for those considering the device as a phone primarily.

It is clear, however, that with Google’s support, Android and HTC have made a solid Internet device that combines web access with technology like GPS and software like Google Maps. Applications like Compass Mode, as Fortune’s Philip Elmer-Dewitt explains, gives you a 360-degree street view, a trick that has been limited to PCs until now.

The phone has so-called push e-mail through its Gmail service. As Fortune reported Monday, T-Mobile was considering a low-tier price plan that would give G1 users free e-mail without a data plan. T-Mobile technology chief Cole Brodman says the company looked at a few different pricing plans, but decided that the e-mail only data plan “doesn’t do the device justice.”

The G1 will have two monthly price options, $25 for data plan limited to 400 text messages or $35 for unlimited data. That’s compares with AT&T’s $30 and $45 data plans for the iPhone.

HTC’s touchscreen has some familiar features, like a shifting orientation if the user tips the phone on its side. It also has a zoom-in function that is done with plus and minus buttons on the screen rather than the two finger pinch or separate approach on the iPhone.

The G1 allows dragging and dropping of pictures and text, a feature the iPhone still lacks. The music player was easy to use and there is a direct link to Amazon’s music store.

Overall, and first impressions being what they are,  the G1 stands well above disappointing touchscreens like Verizon’s (VZ) LG Voyager or Sprint’s (S) Samsung Instinct. And until Research in Motion (RIMM) delivers its touchscreen Storm BlackBerry, T-Mobile’s G1 is the toughest competition yet to the iconic iPhone.

By Scott Moritz

Android lands at T-Mobile Tuesday, and as part of the effort to deliver the Google phone to the mobile market, T-Mobile is considering including free e-mail access.

The new Android-powered phone will have Google’s (GOOG) Gmail service built in, and T-Mobile executives are considering offering access to Gmail free, without the need for a data plan, says one person close to the discussions.

The HTC-manufactured T-Mobile phone will be the first of the hotly-anticipated Android-operated handsets, and one of several new challengers to Apple’s (AAPL) iPhone. The Android project was created by Google to cultivate an open application platform to operate next-generation mobile phones.  T-Mobile  – a unit of Deutshe Telekom (DT) - is expected to unveil the phone during a press conference at 10:30 ET Tuesday, and offer it for sale later this fall.

Analysts see the Google phone as the beginning of an important lead in mobile Internet advertising through ads appearing on Android powered phones. Sandeep Aggarwal, an analyst with Collins Stewart, estimates that the phone will generate $5 billion in incremental revenue for Google by 2011.

Should T-Mobile decide to offer free Gmail access, it would be seen as a big counter move to Research in Motion’s (RIMM) BlackBerry e-mail service, which costs $15 a month extra. And if telcos embrace Google’s ad-supported free e-mail, it could help drive Google’s ultimate aim to spread its successful desktop advertising business to mobile phones.

The move to provide free Gmail has risks, however.

T-Mobile could undercut its own data revenue stream from BlackBerry subscribers if users trade in their Curves and Pearls for the Android phone. But T-Mobile, the No.4 wireless shop, needs an attention-getting strategy like free e-mail to help set itself apart from bigger players like AT&T (T), Verizon (VZ) and Sprint (S).  

Google referred calls for comment to T-Mobile and a T-Mobile representative could not provide an immediate comment.

As for the HTC Android phone itself, one user who got an early trial described the slide out keyboard as a little awkward for some typing tasks. The browsing quality however was “better than BlackBerry and close to the iPhone.”