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, including 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 and cost reduction 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 coupled with the growth of the Internet as an advertising medium may enable us to increase our revenues in the future.

During the second quarter of 2008, we entered into a non-exclusive services agreement (the "Services Agreement") with Google Inc. ("Google") to enable us to run advertisements supplied by Google alongside our search results and on Yahoo! Properties, as well as on Websites of certain partners and Affiliates. Although the Services Agreement was not subject to prior regulatory approval, Yahoo! and Google voluntarily agreed to delay implementation of the Services Agreement while the Antitrust Division of the U.S. Department of Justice (the "DOJ") reviewed the agreement. At the conclusion of its review, the DOJ indicated that it intended to file a complaint to seek to enjoin the implementation of the Services Agreement. Following the DOJ's decision, Google delivered notice to us that it was terminating the Services Agreement effective November 5, 2008.

On October 21, 2008, we announced our intent to significantly reduce our costs. As part of our cost reduction initiatives, we expect to reduce our global workforce by at least 10 percent by December 31, 2008. We expect to incur cash charges related to the workforce reduction for severance and other related costs. In addition, we expect to incur cash costs related to contract terminations and consolidation of facilities as part of these cost reduction initiatives. Total charges are expected to include these cash costs and may also include charges or credits related to stock-based compensation expense and charges related to non-cash impairment costs.

We expect to recognize the foregoing charges during the fourth quarter of 2008 and during 2009. Because our cost reduction initiatives are not yet final, we are unable, at this time, to estimate the amount of cash and total charges, including non-cash impairment charges (if any), we will incur.

Third Quarter Highlights


                                             Three Months Ended                                       Nine Months Ended
                                                September 30,                 2007-2008                 September 30,                 2007-2008
Operating Highlights                      2007                2008             Change             2007                2008              Change
                                                                                    (In thousands)

Revenues                              $ 1,767,506         $ 1,786,426        $  18,920        $ 5,137,276         $ 5,402,113        $  264,837
Income from operations                $   150,192         $    70,174        $ (80,018 )      $   504,176         $   291,312        $ (212,864 )




                                                            Nine Months Ended
                                                              September 30,                2007-2008
Cash Flow Highlights                                      2007              2008            Change
                                                                      (In thousands)

Net cash provided by operating activities             $  1,297,015      $  1,559,234      $   262,219
Net cash used in investing activities                 $   (120,707 )    $ (1,072,542 )    $  (951,835 )
Net cash (used in) provided by financing activities   $ (1,250,731 )    $    222,506      $ 1,473,237

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

Income from operations for the three and nine months ended September 30, 2008 includes incremental costs of $37 million and $73 million, respectively, for outside advisors related to Microsoft Corporation's ("Microsoft") proposals to acquire all or a part of the Company, other strategic alternatives, including the Google agreement, the proxy contest, and related litigation defense costs.

Net cash provided by operating activities for the nine months ended September 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.

During the nine months ended September 30, 2008, we repurchased $79 million of common stock. During the nine months ended September 30, 2007, we repurchased approximately $1.4 billion of common stock and settled a $250 million structured stock repurchase transaction which was entered into in the first quarter of 2007 in which we received 8.4 million shares of our common stock.

During the nine months ended September 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.

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 Ended           Nine Months Ended
                                                         September 30,                September 30,
                                                      2007           2008           2007          2008

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

Gross profit                                             58             57             58           58
Operating expenses:
Sales and marketing                                      23             22             23           23
Product development                                      16             18             15           18
General and administrative                                9             11              8           11
Amortization of intangibles                               1              2              2            1
Strategic workforce realignment costs, net                0              0              0            0

Total operating expenses                                 49             53             48           53

Income from operations                                    9              4             10            5
Other income, net                                         2              1              2            1

Income before income taxes, earnings in equity
interests, and minority interests                        11              5             12            6
Provision for income taxes                               (4 )           (3 )           (5 )         (3 )
Earnings in equity interests                              2              1              2           10
Minority interests in operations of consolidated
subsidiaries                                              0              0              0            0

Net income                                                9 %            3 %            9 %         13 %

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

                                                        Three Months Ended September 30,              Percent               Nine Months Ended September 30,               Percent
                                                   2007          (*)          2008          (*)       Change           2007          (*)          2008          (*)       Change

Marketing services:
Owned and Operated sites                        $   923,061        52 %    $ 1,002,070        56 %           9 %    $ 2,634,896        51 %    $ 2,983,451        55 %          13 %
Affiliate sites                                     620,540        35 %        560,652        31 %         (10 )%     1,863,356        37 %      1,738,671        32 %          (7 )%

Marketing services                              $ 1,543,601        87 %    $ 1,562,722        87 %           1 %    $ 4,498,252        88 %    $ 4,722,122        87 %           5 %
Fees                                                223,905        13 %        223,704        13 %           0 %        639,024        12 %        679,991        13 %           6 %

Total revenues                                  $ 1,767,506       100 %    $ 1,786,426       100 %           1 %    $ 5,137,276       100 %    $ 5,402,113       100 %           5 %

(*) 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 nine months ended September 30, 2008 was attributable to continuing growth in our search and display advertising businesses in the third quarter of 2008. For the remainder of 2008, we expect our revenues to be relatively flat on a year over year basis.

We believe our growing number of users, advertisers, publishers, and inventory, both on and off our network, over recent years has driven 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.

Marketing Services Revenues from Owned and Operated Sites. Marketing services revenues from Owned and Operated sites for the three and nine months ended September 30, 2008 increased by 9 percent and 13 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. The transition of and changes in certain of our broadband access partnerships from being fee-paying user based to an advertising revenue sharing model have also contributed to the increase in marketing services revenues from Owned and Operated sites.

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 nine months ended September 30, 2008 as compared to the same periods in 2007, Page Views increased 17 percent and 20 percent, respectively, and revenue per Page View decreased 7 percent and 5 percent, respectively. The decrease in revenue per Page View is due to a shift to lower-yielding display advertising.

The primary components of our marketing services revenues from Owned and Operated sites are growth in search and display advertising. During the three and nine months ended September 30, 2008, revenues from search advertising on Owned and Operated sites grew 17 percent and 18 percent, respectively, compared to the same periods in 2007. During the three and nine months ended September 30, 2008, revenues from display advertising on Owned and Operated sites grew 3 percent and 10 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 nine months ended September 30, 2008 decreased 10 percent and 7 percent, respectively, as compared to the same periods in 2007. The sale of Overture Japan to Yahoo! Japan in the third quarter of 2007 negatively impacted the Affiliate revenues during the three and nine months ended September 30, 2008 by approximately

$90 million and $320 million, respectively, on a year over year basis. For the remainder of 2008, we expect our marketing services revenues from Affiliate sites to be relatively flat on a year over year basis.

The number of searches on Affiliate sites increased by approximately 18 percent for both the three and nine months ended September 30, 2008, as compared to the same periods in 2007. The increase in the volume of searches is primarily attributed to a slight 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 27 percent and 24 percent, respectively, for the three and nine months ended September 30, 2008, as compared to the same periods in 2007, primarily as a result of a change in traffic mix and the impact of the aforementioned sale of Overture Japan to Yahoo! Japan.

Fees Revenues. Fees revenues for the three months ended September 30, 2008 were flat and increased 6 percent, for the nine months ended September 30, 2008 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.

Fees revenues remained flat year over year due to the transition of and changes in certain of our broadband access partnerships, from being fee-paying user based to an advertising revenue sharing model. The market has moved to an environment in which advertising revenue sharing is the prevailing model, and we are evolving our partnerships accordingly. This has resulted 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 have renewed contracts with broadband partners and our relationships have moved from being fee-paying user based to an advertising revenue-sharing model, our number of fee-paying users has decreased.

The increase in fees revenues for the nine months ended September 30, 2008 is due to an increase in the number of paying users during the first quarter of 2008.

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 10.8 million as of September 30, 2008 compared to 18.7 million as of September 30, 2007, a decrease of 42 percent as a result of the business model changes described above. Average monthly revenues per paying user was approximately $4 for both the three and nine months ended September 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 nine months ended September 30, 2008 is due to the change in mix of fee-based subscribers, primarily the reduction in broadband subscribers due to the renegotiation of broadband partnerships from fee-paying user based to an advertising revenue sharing model.

Adjusting the number of fee-paying users as of September 30, 2007 to remove fee-paying users related to our renewed broadband relationships, our fee-paying users would have been 9.9 million, compared to 10.8 million as of September 30, 2008, an increase of 9 percent.

Costs and Expenses. Operating costs and expenses consist of cost of revenues, sales and marketing, product development, general and administrative, and amortization of intangibles expenses. Cost of revenues consists of traffic acquisition costs ("TAC"), Internet connection charges, and other expenses associated with the production and usage of Yahoo! Properties, including amortization of acquired intellectual property rights and developed technology.

As part of our cost reduction initiatives announced on October 21, 2008, we expect to reduce our global workforce by at least 10 percent by December 31, 2008. We expect to incur cash charges related to the workforce reduction for severance and other related costs and cash costs related to contract terminations and consolidation of facilities as part of these cost reduction initiatives. Total charges may also include charges or credits related to stock-based compensation expense and charges related to non-cash impairment costs. We expect to recognize the foregoing charges during the fourth quarter of 2008 and during 2009.

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

                                               Three Months Ended September 30,                 Percent          Dollar
                                          2007          (*)          2008           (*)         Change           Change

Cost of revenues                       $   740,200        42 %    $   772,277         43 %             4 %      $  32,077
Sales and marketing                    $   410,936        23 %    $   396,982         22 %            (3 )%     $ (13,954 )
Product development                    $   274,682        16 %    $   323,172         18 %            18 %      $  48,490
General and administrative             $   161,511         9 %    $   199,593         11 %            24 %      $  38,082

                                                Nine Months Ended September 30,                 Percent          Dollar
                                          2007          (*)          2008           (*)         Change           Change

Cost of revenues                       $ 2,136,849        42 %    $ 2,293,271         42 %             7 %      $ 156,422
Sales and marketing                    $ 1,168,785        23 %    $ 1,226,472         23 %             5 %      $  57,687
Product development                    $   795,268        15 %    $   943,497         18 %            19 %      $ 148,229
General and administrative             $   449,934         8 %    $   559,484         11 %            24 %      $ 109,550
Amortization of intangibles            $    82,264         2 %    $    71,192          1 %           (13 )%     $ (11,072 )
Strategic workforce realignment
costs, net                             $         -         -      $    16,885          0 %           100 %      $  16,885

(*) Percent of total revenues.

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

                                   Three Months Ended September 30,              Nine Months Ended September 30,
                                      2007                   2008                  2007                   2008

Cost of revenues                $          2,555       $          4,283      $          6,919       $         11,112
Sales and marketing                       70,353                 51,060               172,731                172,904
Product development                       51,603                 55,372               164,354                149,896
General and administrative                21,029                 21,884                70,321                 59,144
Strategic workforce
realignment expense reversals                  -                      -                     -                (12,284 )

Total stock-based
compensation expense            $        145,540       $        132,599      $        414,325       $        380,772