Forward-Looking Statements

In addition to current and historical information, this Quarterly Report on Form 10-Q ("Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments, and business strategies. These statements can, in some cases, be identified by the use of terms such as "may," "will," "should," "could," "would," "intend," "expect," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," or "continue" or the negative of such terms or other comparable terminology. This Report includes, among others, forward-looking statements regarding our:

• expectations about revenues for marketing services and fees;

• expectations about growth in users;

• expectations about cost of revenues and operating expenses;

• expectations about our effective tax rate and the amount of unrecognized tax benefits;

• expectations about our on-going strategic initiatives;

• anticipated capital expenditures;

• impact of recent acquisitions on our business and evaluation of, and expectations for, possible acquisitions of, or investments in, businesses, products, and technologies; and

• expectations about positive cash flow generation and existing cash, cash equivalents, and investments being sufficient to meet normal operating requirements.

These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part II, Item 1A, "Risk Factors" of this Report. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances.

Overview

We are a leading global Internet brand and one of the most trafficked Internet destinations worldwide. We are focused on powering our communities of users, advertisers, publishers, and developers by creating indispensable experiences built on trust. We seek to provide Internet services that are essential and relevant to these communities of users, advertisers, publishers, and developers. Publishers, such as eBay Inc., WebMD, Cars.com, Forbes.com, and the Newspaper Consortium (our strategic partnership with a consortium of more than 20 leading United States ("U.S.") newspaper publishing companies), are a subset of our distribution network of third-party entities (referred to as "Affiliates") and are primarily Websites and search engines that attract users by providing content of interest, presented on Web pages that have space for advertisements. We manage and measure our business geographically. Our geographic segments are the U.S. and International.

To users, we provide owned and operated online properties and services ("Yahoo! Properties" or "Owned and Operated sites"). We also extend our marketing platform and access to Internet users beyond Yahoo! Properties through our Affiliates who have integrated our advertising offerings into their Websites (referred to as "Affiliate sites") or their other offerings.

To advertisers and publishers, we provide a range of marketing solutions and tools that enable businesses to reach users who visit Yahoo! Properties and our Affiliate sites.

To developers, we provide an innovative and easily accessible array of Web Services and Application Programming Interfaces ("APIs"), technical resources, tools, and channels to market.

We focus on expanding our communities of users and deepening their engagement on Yahoo! Properties to enhance the value of our users to advertisers and publishers and thereby increase the spending of advertisers and

publishers with us. We believe that we can expand our communities of users by offering compelling Internet services and effectively integrating search, community, personalization, and content to create a powerful user experience. We leverage our user relationships and the social community the users create to enhance our online advertising potential, as well as our fee-based services.

As used below, "Page Views" is defined as our internal estimate of the total number of Web pages viewed by users on Owned and Operated sites. "Searches" is defined as online search queries that may yield Internet search results ranked and sorted based on relevance to the user's search query. "Sponsored search results" are a subset of the overall search results and provide links to paying advertisers' Web pages. A "click-through" occurs when a user clicks on an advertisers' language.

We believe the searches, Page Views, click-throughs, and the related marketing services and fees revenues that we generate correlate to the number and activity level of users across our offerings on Yahoo! Properties and the activity level on our Affiliate sites. By providing a platform for our users that brings together our search technology, content, and community while allowing for personalization and integration across devices, we seek to become more essential to, increase our share of, and deepen the engagement of, our users with our products and services. We believe this deeper engagement of new and existing users and our enhanced algorithmic search technology, coupled with the growth of the Internet as an advertising medium may enable us to increase our revenues during 2008.

Second Quarter Highlights


                                            Three Months Ended                              Six Months Ended
                                                 June 30,               2007-2008               June 30,               2007-2008
Operating Highlights                       2007            2008           Change          2007            2008           Change
                                                                             (In thousands)

Revenues                                $ 1,697,920     $ 1,798,085     $  100,165     $ 3,369,770     $ 3,615,687     $  245,917
Income from operations                  $   184,957     $   100,521     $  (84,436 )   $   353,984     $   221,138     $ (132,846 )




                                                            Six Months Ended
                                                                June 30,                 2007-2008
Cash Flow Highlights                                      2007            2008            Change
                                                                      (In thousands)

Net cash provided by operating activities              $  840,303      $ 1,212,143      $   371,840
Net cash provided by (used in) investing activities    $   33,093      $  (873,525 )    $  (906,618 )
Net cash (used in) provided by financing activities    $ (928,673 )    $   181,523      $ 1,110,196

Income from operations for the six months ended June 30, 2008 includes a net $17 million pre-tax strategic workforce realignment, which was recorded in the first quarter of 2008.

Income from operations for the three and six months ended June 30, 2008 includes incremental costs of $22 million and $36 million, respectively, for outside advisors related to Microsoft Corporation's ("Microsoft") proposals to acquire all or a part of the Company, other strategic alternatives, the recently resolved proxy contest, and related litigation defense costs.

Net cash provided by operating activities for the six months ended June 30, 2008 includes a $350 million one-time payment related to a commercial arrangement entered into with AT&T Inc., which was recorded in long-term deferred revenue in the first quarter of 2008 and is being recognized in marketing services revenues over the underlying service period.

In the first half of 2007, we repurchased approximately $1.0 billion of common stock and also entered into a $250 million structured share repurchase transaction. In the first half of 2008, we repurchased $79 million of common stock.

During the six months ended June 30, 2008, our zero coupon senior convertible notes (the "Notes") were converted, resulting in the issuance of 36.6 million shares and payment of less than $1 million in cash.

During the second quarter of 2008, we entered into a non-exclusive services agreement with Google Inc. ("Google"). The agreement enables Yahoo! to run advertisements supplied by Google alongside Yahoo!'s search

results and on Yahoo! Properties, as well as on Websites of certain partners and Affiliates. The agreement applies to Yahoo!'s operations in the U.S. and Canada only. Under the terms of the agreement, Yahoo! will select the search term queries for which, and the pages on which, Yahoo! may offer Google paid search results. Yahoo! will define its users' experience and will determine the number and placement of the results provided by Google and the mix of paid results provided by Yahoo!, Google or other providers. The agreement has a term of up to ten years: a four-year initial term and, at Yahoo!'s option, two successive three-year renewals. The agreement may be terminated by either party in the event of a change in control of either party and upon certain other events. If Yahoo! has a change in control within twenty four months after the date of the agreement, we must pay Google a termination fee of $250 million, which is subject to reduction by 50 percent of the net revenues earned by Google under the agreement. Although the agreement is not subject to prior regulatory approval, Yahoo! and Google have voluntarily agreed to delay implementation of the agreement for up to three and a half months while the U.S. Department of Justice reviews the arrangement.

Results of Operations

The following table sets forth selected information on our results of operations
as a percentage of revenues for the periods indicated:


                                                                 Three Months                 Six Months
                                                                Ended June 30,              Ended June 30,
                                                               2007          2008          2007          2008

Revenues                                                           100 %       100 %          100 %        100 %
Cost of revenues                                                    40          43             41           42

Gross profit                                                        60          57             59           58
Operating expenses:
Sales and marketing                                                 23          23             22           23
Product development                                                 17          17             15           17
General and administrative                                           8          10              9           10
Amortization of intangibles                                          1           1              2            1
Strategic workforce realignment costs, net                           -           -              -            1

Total operating expenses                                            49          51             48           52

Income from operations                                              11           6             11            6
Other income, net                                                    2           1              2            1

Income before income taxes, earnings in equity interests
and minority interests                                              13           7             13            7
Provision for income taxes                                          (5 )        (3 )           (5 )         (2 )
Earnings in equity interests                                         1           3              1           14
Minority interests in operations of consolidated
subsidiaries                                                         0           0              0            0

Net income                                                           9 %         7 %            9 %         19 %

Revenues. Revenues by groups of similar services are as follows (dollars in thousands):

                                                          Three Months Ended June 30,                 Percent                  Six Months Ended June 30,                  Percent
                                                   2007          (*)          2008          (*)       Change           2007          (*)          2008          (*)       Change

Marketing services:
Owned and Operated sites                        $   892,290        53 %    $ 1,015,705        56 %          14 %    $ 1,711,834        51 %    $ 1,981,381        55 %          16 %
Affiliate sites                                     593,742        35 %        571,251        32 %          (4 )%     1,242,817        37 %      1,178,019        32 %          (5 )%

Marketing services                              $ 1,486,032        88 %    $ 1,586,956        88 %           7 %    $ 2,954,651        88 %    $ 3,159,400        87 %           7 %
Fees                                                211,888        12 %        211,129        12 %           0 %        415,119        12 %        456,287        13 %          10 %

Total revenues                                  $ 1,697,920       100 %    $ 1,798,085       100 %           6 %    $ 3,369,770       100 %    $ 3,615,687       100 %           7 %

(*) Percent of total revenues.

We currently generate marketing services revenues principally from display advertising on Owned and Operated sites and from sponsored search results generated from searches on Owned and Operated and Affiliate sites. In addition, we receive revenues for Content Match links (advertising on Yahoo! Properties and Affiliate sites which include contextually relevant advertiser links to their respective Websites) on Owned and Operated and Affiliate sites and display advertising on Affiliate sites. The net revenues and related volume metrics from Content Match links and display advertising on Affiliate sites are not currently material and are excluded from the discussion and calculation of average revenue per Page View on Owned and Operated sites and average revenue per search on Affiliate sites that follows. Our revenue growth for the three and six months ended June 30, 2008 was attributable to continuing growth in our search and display advertising businesses.

For the three months ended June 30, 2008, the transition of and changes in certain of our broadband access partnerships, from being fee-paying user-based to an advertising revenue sharing model, also resulted in a decline in fees revenues which were flat compared to the three months ended June 30, 2007.

For the six months ended June 30, 2008, this growth was partially offset by a change in our search marketing relationship with Yahoo! Japan which reduced our reported revenues.

We believe our growing number of users, advertisers, publishers, and inventory, both on and off our network, over recent years has been driving the increases in our marketing services revenues. We also believe our expanding offerings, including our enhanced algorithmic search technology, contribute to our growing number of users. As our user base increases, we process a higher number of searches and generate a higher number of Page Views. We also believe that our growing audience of users makes Yahoo! Properties more attractive to advertisers and increases their spending on marketing services. Further, we believe the growth in users on Yahoo! Properties and on the Internet overall reflects the increasing acceptance, importance, and dependence of users on the Internet. As a result, we believe advertisers are shifting a greater percentage of their spending from traditional media to the Internet to reach this growing online audience.

Marketing Services Revenues from Owned and Operated Sites. Marketing services revenues from Owned and Operated sites for the three and six months ended June 30, 2008 increased by 14 percent and 16 percent, respectively, as compared to the same periods in 2007. Factors leading to growth in overall marketing services revenues included an increase in user activity levels on Yahoo! Properties, which contributed to a higher volume of searches, Page Views, click-throughs, and ad impression displays. Also, our growing audience of users makes Yahoo! Properties more attractive to advertisers and increases their spending on marketing services. We expect marketing services revenues from our Owned and Operated sites to continue growing at a rate faster than total revenues.

We periodically review and refine our methodology for monitoring, gathering, and counting Page Views to more accurately reflect the total number of Web pages viewed by users on Yahoo! Properties. Based on this process, from time to time we update our methodology to exclude from the count of Page Views interactions with our servers that we determine or believe are not the result of user visits to our Owned and Operated sites. Using our updated methodology, for the three and six months ended June 30, 2008 as compared to the same periods in 2007, Page Views increased 23 percent and 21 percent, respectively, and revenue per Page View decreased 7 percent and

4 percent, respectively. The decrease in revenue per Page View is due to a mix shift to lower-yielding display advertising.

Underlying our marketing services revenues from Owned and Operated sites for the three and six months ended June 30, 2008 is growth in search and display advertising. During the three and six months ended June 30, 2008, revenues from search advertising on Owned and Operated sites grew 18 percent and 19 percent, respectively, compared to the same periods in 2007. During the three and six months ended June 30, 2008, revenues from display advertising on Owned and Operated sites grew 12 percent and 14 percent, respectively, compared to the same periods in 2007.

Marketing Services Revenues from Affiliate sites. Marketing services revenues from Affiliate sites for the three and six months ended June 30, 2008 decreased 4 percent and 5 percent, respectively, as compared to the same periods in 2007. As more inventory becomes available on the Web, it has, and will continue to make, the Affiliate business more competitive; consequently, our portion of revenue share from Affiliate sites is declining. We expect this trend to continue in 2008. However, we also expect to experience some favorable impact from our off-network display initiatives. While this display business is still relatively small, we expect continued growth as our major partnerships gain momentum. The sale of Overture Japan to Yahoo! Japan in the third quarter of 2007 negatively impacted the Affiliate revenues during the three and six months ended June 30, 2008 by approximately $120 million and $230 million, respectively, on a year over year basis.

The number of searches on Affiliate sites increased by approximately 18 percent for both the three and six months ended June 30, 2008, as compared to the same periods in 2007. The increase in the volume of searches is primarily attributed to the net increase in the number of Affiliates, as well as increases in searches per Affiliate.

The average revenue per search on our Affiliate sites decreased by 23 percent for both the three and six months ended June 30, 2008, as compared to the same periods in 2007, primarily as a result of a change in traffic mix, as well as due to traffic quality initiatives, and the impact of the aforementioned sale of Overture Japan to Yahoo! Japan.

Fees Revenues. Fees revenues for the three and six months ended June 30, 2008 increased less than 1 percent and 10 percent, respectively, as compared to the same periods in 2007.

Our fees revenues include premium fee-based services such as Internet broadband services, sports, music, photos, games, personals, premium e-mail offerings, and services for small businesses. Other fee-based revenues include royalties, licenses, and mobile services.

The year over year growth in fees revenues is associated with the increase in our licensing fees, mobile services contracts, and fee-based services partially offset by the impact of new broadband arrangements. The market has moved to an environment in which advertising revenue sharing is the prevailing model, and we are evolving our partnerships accordingly. This will result in a reduction in fees revenues associated with these partnerships, but is expected to be offset by increased marketing services revenues associated with the display advertising and sponsored search revenue share arrangements. As we renew contracts with broadband partners and our relationships move from being fee-paying user based to an advertising revenue sharing model, our number of fee-paying users will decrease.

As used in this discussion, "fee-paying users" is based on the total number of fee-based subscriptions aggregated from each Yahoo! Property. To calculate the average revenue per fee-paying user, we divide the revenue generated from the subscriptions by the average fee-paying users during the quarter.

The number of paying users for our fee-based services decreased to 10.2 million as of June 30, 2008 compared to 16.9 million as of June 30, 2007, a decrease of 40 percent as a result of these business model changes. Average monthly revenues per paying user was approximately $4 for both the three and six months ended June 30, 2008, respectively, compared to approximately $3 for the same periods in 2007. The increase in average monthly revenues per paying user for both the three and six months ended June 30, 2008 is due to the renegotiation of broadband partnerships from being fee-paying user-based to an advertising revenue sharing model.

Adjusting the number of fee-paying users as of June 30, 2007 to remove fee-paying users related to our renewed broadband relationships, our fee-paying users would have been 8.4 million. Comparing this adjusted fee-paying user number to the 10.2 million fee-paying users as of June 30, 2008, this yielded an increase of 21 percent.

Costs and Expenses. Operating costs and expenses are as follows (dollars in thousands):

$

                                         Three Months Ended June 30,                Percent                   Six Months Ended June 30,                   Percent
                                   2007         (*)         2008         (*)        Change            2007          (*)          2008          (*)        Change

Cost of revenues                 $ 683,012        40 %    $ 765,911        43 %           12 %     $ 1,396,649        41 %    $ 1,520,994        42 %            9 %
Sales and marketing              $ 390,430        23 %    $ 404,899        23 %            4 %     $   757,849        22 %    $   829,490        23 %            9 %
Product development              $ 281,086        17 %    $ 314,719        17 %           12 %     $   520,586        15 %    $   620,325        17 %           19 %
General and administrative       $ 133,258         8 %    $ 188,811        10 %           42 %     $   288,423         9 %    $   359,891        10 %           25 %
Amortization of intangibles      $  25,177         1 %    $  23,224         1 %           (8 )%    $    52,279         2 %    $    46,964         1 %          (10 )%
Strategic workforce
realignment costs, net           $       -         -      $       -         -              -       $         -         -      $    16,885         1 %          100 %

(*) Percent of total revenues.

Stock-based compensation expense was allocated as follows (in thousands):

                                            Three Months Ended June 30,              Six Months Ended June 30,
                                             2007                  2008               2007                2008

Cost of revenues                        $        2,357        $        3,549      $       4,364        $    6,829
Sales and marketing                             52,110                56,306            102,378           121,844
Product development                             64,451                46,442            112,751            94,524
General and administrative                       9,861                16,871             49,292            37,260
Strategic workforce realignment
expense reversals                                    -                     -                  -           (12,284 )

Total stock-based compensation
expense                                 $      128,779        $      123,168      $     268,785        $  248,173

See Note 10 - "Stock-Based Compensation" in the Notes to the condensed consolidated financial statements as well as our Critical Accounting Policies, Judgments, and Estimates for additional information about stock-based compensation.

Cost of Revenues. Cost of revenues consists of traffic acquisition costs and other expenses associated with the production and usage of Yahoo! Properties, including amortization of acquired intellectual property rights and developed technology.

Traffic Acquisition Costs ("TAC"). TAC consist of payments made to Affiliates and payments made to companies that direct consumer and business traffic to Yahoo! Properties. We enter into agreements of varying duration that involve TAC. There are generally three economic structures of the Affiliate agreements:
fixed payments based on a guaranteed minimum amount of traffic delivered, which often carry reciprocal performance guarantees from the Affiliate; variable payments based on a percentage of our revenues or based on a certain metric, such as number of searches or paid clicks; or a combination of the two. We expense TAC under two different methods. Agreements with fixed payments are expensed ratably over the term the fixed payment covers, and agreements based on a percentage of revenues, number of paid introductions, number of searches, or other metrics are expensed based on the volume of the underlying activity or revenues multiplied by the agreed-upon price or rate.

Other Cost of Revenues. Other cost of revenues consist of fees paid to third parties for content, Internet connection charges, data center costs, server equipment depreciation, technology license fees, amortization of acquired intellectual property rights and developed technology, and compensation related expenses (including stock-based compensation expense).

Cost of revenues are as follows (dollars in thousands):

                                     Three Months Ended June 30,                Percent                  Six Months Ended June 30,                   Percent
                               2007         (*)         2008         (*)        Change           2007          (*)          2008          (*)        Change
. . .