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 the amount of unrecognized tax benefits;

• expectations about our on-going cost 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

Yahoo! Inc., together with its consolidated subsidiaries ("our," "we," or "us"), is 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. Together with our owned and operated online properties and services ("Yahoo! Properties" or "Owned and Operated sites"), we also provide our advertising offerings and access to Internet users beyond Yahoo! through our distribution network of third-party entities ("Affiliates"), who have integrated our advertising offerings into their Websites, referred to as Affiliate sites, or their other offerings. We generate revenues by providing marketing services to advertisers across a majority of Yahoo! Properties and Affiliate sites. Additionally, although many of the services we provide to our users are free, we do charge fees for a range of premium services.

We provide a range of marketing services that make it easier and more effective for advertisers and marketers to reach and connect with users who visit Yahoo! Properties and our Affiliate sites. We believe that our marketing services enable advertisers to deliver highly relevant marketing messages to their target audiences.

Our offerings to users on Yahoo! Properties currently fall into six categories:
Front Doors, Communities, Search, Communications, Audience, and Connected Life. The majority of our offerings are available in more than 30 languages. We manage and measure our business geographically. Our principal geographies are the United States ("U.S.") and International.

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. "Search" is defined as an online search query 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.

First Quarter Results




                                        Three Months Ended       2008-2009
                                             March 31,             Dollar
            Operating Results           2008          2009         Change
                                                 (In thousands)
            Revenues                 $ 1,817,602   $ 1,580,042   $ (237,560 )
            Income from operations   $   120,617   $   100,685   $  (19,932 )

                                                          Three Months Ended        2008-2009
                                                              March 31,               Dollar
Cash Flow Results                                        2008           2009          Change
                                                                   (In thousands)
Net cash provided by operating activities              $ 786,305     $  262,349     $ (523,956 )
Net cash provided by (used in) investing activities    $  18,410     $ (216,331 )   $ (234,741 )
Net cash (used in) provided by financing activities    $  (5,159 )   $   15,720     $   20,879

Our revenue decline of 13 percent year over year can be attributed to a reduction in our marketing services revenues primarily due to the economic environment and the impact of foreign currency rate fluctuations. Marketing services and fees revenues experienced 12 percent and 20 percent year over year declines, respectively. The decline in income from operations reflects a decrease in revenues partially offset by decreases in operating expenses of $163 million. The decrease in operating expenses is due to our cost reduction initiatives.

Cash generated from our operations is a measure of the cash productivity of our business model. Our operating activities in the first quarter of 2009 generated adequate cash to meet our operating needs. Cash used in investing activities in the first quarter of 2009 included capital expenditures of $70 million and net purchases of marketable debt securities of $140 million.

Results of Operations

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



                                       Three Months Ended March 31,           Percent
                                     2008       (*)        2009       (*)     Change
       Marketing services:
       Owned and Operated sites   $   965,660    53 %   $   871,764    55 %       (10 )%
       Affiliate sites                606,784    34 %       511,417    33 %       (16 )%

       Marketing services           1,572,444    87 %     1,383,181    88 %       (12 )%
       Fees                           245,158    13 %       196,861    12 %       (20 )%

       Total revenues             $ 1,817,602   100 %   $ 1,580,042   100 %       (13 )%

(*) Percent of total revenues.

We generate marketing services revenues principally from display advertising on Owned and Operated sites and from search advertising. We also receive revenues for click-throughs on content match links (advertising in the form of contextually relevant advertiser links) on Owned and Operated and Affiliate sites and display advertising on Affiliate sites. The net revenues and related volume metrics from these additional sources 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.

We currently expect revenues to decrease for the three months ending June 30, 2009 compared to the three months ended June 30, 2008 due primarily to the economic environment. Adverse economic conditions have caused some advertisers to spend less on online advertising which could negatively affect the growth rate of our revenues, particularly our display revenues as advertisers spend less on brand advertising. In addition, strengthening of the U.S. Dollar against other currencies could have a further negative impact on our international revenues.

Marketing Services Revenues from Owned and Operated Sites. Marketing services revenues from Owned and Operated sites for the three months ended March 31, 2009 decreased by $94 million, or 10 percent, as compared to the same period in 2008. The primary components of our marketing services revenues from Owned and Operated sites are search and display advertising. For the three months ended March 31, 2009, revenues from search advertising and display advertising on Owned and Operated sites declined 3 percent and 13 percent, respectively, compared to the same period of 2008. We believe the decline in overall marketing services revenues was mainly due to the economic environment and the effects of foreign currency exchange rate fluctuations.

Although increased user activity levels on Yahoo! Properties has contributed to a higher volume of search queries, Page Views, and advertising impression displays, lower advertising spending and a shift to lower yielding inventory in both search and display advertising has resulted in decreased 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 months ended March 31, 2009 as compared to the same period in 2008, Page Views increased 8 percent and revenue per Page View decreased 16 percent. The decline in revenue per Page View was due to the decline in revenues from the factors discussed above.

Marketing Services Revenues from Affiliate sites. Marketing services revenues from Affiliate sites for the three months ended March 31, 2009 decreased $95 million, or 16 percent, as compared to the same period in 2008. The decrease was driven primarily by lower advertising spending and a shift to lower yielding inventory.

The number of searches on Affiliate sites increased by approximately 37 percent in the three months ended March 31, 2009, as compared to the same period in 2008. As we continue to employ network quality initiatives, we have seen an increase in traffic from our Affiliate partners. The increase in the volume of searches is primarily attributed to increases in searches per Affiliate.

The average revenue per search on our Affiliate sites decreased by 39 percent in the three months ended March 31, 2009, as compared to the same period in 2008, primarily as a result of lower advertising spending and a shift to lower yielding inventory.

Fees Revenues. 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 for the three months ended March 31, 2009 decreased $48 million, or 20 percent, as compared to the same period of 2008. The decrease in fees revenues can be primarily attributed to changes in certain of our broadband access partnerships, from being fee-paying user based to an advertising revenue sharing model as well as our outsourcing of the voice over internet protocol, or VOIP, and subscription music businesses.

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 fee-paying users for our fee-based services decreased to 8.4 million as of March 31, 2009 compared to 17.4 million as of March 31, 2008, a decrease of 52 percent as a result of the business model changes described above. Average monthly revenues per fee-paying user was approximately $4 for the three months ended March 31, 2009, compared to approximately $3 for the same period in 2008. The increase in average monthly revenues per fee-paying user for the three months ended March 31, 2009 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 March 31, 2008 to remove fee-paying users related to our renewed broadband relationships, our fee-paying users would have been 9.6 million as compared to 8.4 million as of March 31, 2009, a decrease of 13 percent.

Costs and Expenses. Operating costs and expenses consist of cost of revenues, sales and marketing, product development, general and administrative, amortization of intangible assets, and restructuring charges, net. Cost of revenues consists of traffic acquisition costs, 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.

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

                                      Three Months March 31,            Percent        Dollar
                                  2008      (*)       2009      (*)     Change         Change
  Cost of revenues              $ 755,083    42 %   $ 700,737    44 %        (7 )%   $  (54,346 )
  Sales and marketing           $ 424,591    23 %   $ 321,112    20 %       (24 )%   $ (103,479 )
  Product development           $ 305,606    17 %   $ 306,043    19 %         0 %    $      437
  General and administrative    $ 171,080     9 %   $ 136,997     9 %       (20 )%   $  (34,083 )
  Amortization of intangibles   $  23,740     1 %   $   9,667     1 %       (59 )%   $  (14,073 )
  Restructuring charges, net    $  16,885     1 %   $   4,801     0 %       (72 )%   $  (12,084 )

(*) Percent of total revenues.

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

                                                      Three Months Ended
                                                           March 31,
                                                      2008          2009
           Cost of revenues                         $   3,280     $   3,579
           Sales and marketing                         65,538        49,897
           Product development                         48,082        54,278
           General and administrative                  20,389        18,966
           Restructuring expense reversals, net       (12,284 )          -

           Total stock-based compensation expense   $ 125,005     $ 126,720

For additional information about stock-based compensation see Note 9 - "Stock-Based Compensation" in the Notes to the condensed consolidated financial statements elsewhere in this quarterly report as well as "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2008 under the caption Management's Discussion and Analysis of Financial Condition and Results of Operations.

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.

Compensation, Information Technology, Depreciation and Amortization, and Facilities Expenses. Compensation expense consists primarily of salary, bonuses, commissions, and stock-based compensation expense. Information and technology expense includes telecom usage charges and data center operating costs. Depreciation and amortization expense consists primarily of depreciation of server equipment and information technology assets and amortization of developed or acquired technology and intellectual property rights. Facilities expense consists primarily of building maintenance costs, rent expense, and utilities.

The changes in operating costs and expenses for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 are comprised of the following (in thousands):

                                                      Information       Depreciation and
                                  Compensation        Technology          Amortization          Facilities          TAC           Other          Total
Cost of revenues                 $        1,824      $        (263 )    $           1,514      $        166      $ (41,748 )    $ (15,839 )    $  (54,346 )
Sales and marketing                     (53,955 )              114                    (26 )          (3,725 )           -         (45,887 )      (103,479 )
Product development                        (170 )           (3,727 )                7,056            (1,069 )           -          (1,653 )           437
General and administrative              (18,468 )             (803 )                 (410 )           1,208             -         (15,610 )       (34,083 )
Amortization of intangibles                  -                  -                 (14,073 )              -              -              -          (14,073 )
Restructuring charges, net                   -                  -                      -                 -              -         (12,084 )       (12,084 )

Total                            $      (70,769 )    $      (4,679 )    $          (5,939 )    $     (3,420 )    $ (41,748 )    $ (91,073 )    $ (217,628 )

Compensation Expense. Total compensation expense decreased $71 million for the three months ended March 31, 2009, as compared to the same period of 2008. The decrease was primarily due to decreases in our total headcount, primarily in the sales and marketing function (partially offset by increased headcount in the product development function).

TAC. TAC decreased $42 million for the three months ended March 31, 2009, as compared to the same period of 2008. The decrease was primarily driven by the decline in revenues as well was as changes in Affiliate partner mix. The decrease in TAC was slightly offset by a small increase in average TAC rates.

Other Expenses. Other expenses decreased $91 million for the three months ended March 31, 2009, as compared to the same period of 2008 mainly due to decreases in marketing-related expenses of $37 million, decreases in restructuring charges, net of $12 million, and decreases in content costs of $18 million. The decrease in marketing-related expenses was due to fewer marketing ad campaigns and advertising expenses during the first quarter 2009 as compared to the same period of 2008 as we continue to manage our costs. Content costs, included in costs of revenues and driven by our rich media offerings, decreased due to lower content costs for various properties as we transition out of and/or outsource certain offerings. In addition, decreases in third-party service provider expenses of $12 million was primarily due to lower costs for advisors related to Microsoft's proposal to acquire all or part of the Company, other strategic alternatives, including the Google agreement, the proxy contest, and related litigation defense in the first quarter of 2009 as compared to the same period in 2008.

We currently expect our operating costs to decrease for the second quarter of 2009 compared to the second quarter of 2008 due primarily to our cost reduction initiatives.

Restructuring Charges, Net. During the first quarter of 2008, we implemented a strategic workforce realignment to more appropriately allocate resources to our key strategic initiatives. During the fourth quarter of 2008, we implemented cost reduction initiatives, including a workforce reduction and consolidation of our real estate facilities. In connection with the cost reduction initiative under taken during the fourth quarter of 2008, we recorded charges in the first quarter of 2009 for severance benefits provided and facilities vacated during the quarter.

Restructuring charges, net was comprised of the following (in thousands):

                                                                 Three Months Ended
                                                             March 31,         March 31,
                                                               2008              2009
Employee severance pay and related costs                    $    29,169       $     1,809
Non-cancelable lease, contract termination, and other
charges                                                              -              2,992

Sub-total before reversal of stock-based compensation
expense                                                          29,169             4,801
Reversal of stock-based compensation expense for
forfeitures                                                     (12,284 )              -

Restructuring charges, net                                  $    16,885       $     4,801

In addition to the charges described above, we currently expect to incur charges in the remainder of 2009 of between $30 million and $40 million for non-cancelable lease costs, relocation costs, and the write-off of tenant improvements and furniture and fixtures as we continue to exit facilities identified as part of the 2008 cost reduction initiatives. See Note 14 - "Restructuring charges, net" in the Notes to the condensed consolidated financial statements for additional information.

On April 21, 2009, we announced that we expect to reduce our number of then-current employees worldwide by approximately 5 percent. We expect to incur cash charges related to this workforce reduction for severance and other related costs. Total charges are expected to include these cash costs and may also include charges or credits related to stock-based compensation expense. We expect to recognize the foregoing charges during the second quarter of 2009, but are unable, at this time, to estimate the amount of cash and total charges we will incur.

Other Income, Net. Other income, net was as follows (in thousands):

                                            Three Months Ended
                                                 March 31,            2008-2009
                                             2008          2009         Change
                                                      (In thousands)
         Interest and investment income   $   23,167     $  6,848     $  (16,319 )
         Investment gains (losses), net       (2,210 )         90          2,300
         Other                                (6,292 )     (1,978 )        4,314

         Total other income, net          $   14,665     $  4,960     $   (9,705 )

Other income, net was $5 million for the three months ended March 31, 2009, a decrease of $10 million, as compared to the same period in 2008. Interest and investment income for the first quarter of 2009 decreased $16 million mainly due to a lower average interest rate of 0.8 percent compared to 3.6 percent for the same period in 2008. Other charges decreased by $4 million for the three months ended March 31, 2009, as compared to the same period of 2008, primarily due to the adoption of FSP APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)". No such charges were recorded during the three months ended March 31, 2009, because the debt matured on April 1, 2008. See Note 8 - "Debt" in the Notes to the condensed consolidated financial statements for additional information.

Other income, net may fluctuate in future periods due to realized gains and losses on investments, impairments of investments, changes in our average investment balances, and changes in interest and foreign currency exchange rates.

Income Taxes. The effective tax rate for the three months ended March 31, 2009 was 34 percent, compared to approximately 39 percent for the same period in 2008. These effective tax rates differ from the amounts computed by applying the federal statutory income tax rate primarily due to state taxes, the effect of non-U.S. operations, non-deductible stock-based compensation expense, and a one- time tax benefit related to a California state law change that was enacted during the quarter. The effective tax rate in 2009 was lower than the rate for the same period in 2008 primarily due to the effect of the California state law change. We currently expect the effective tax rate for fiscal year 2009 to be 44 percent to 47 percent, excluding the one-time benefit of the California state law change and any other discrete items that may occur during the remainder of the year.

During the three months ended March 31, 2009, we recorded a decrease in our total unrecognized tax benefits of approximately $9 million bringing the balance to $789 million. Over the next twelve months, our existing tax positions are expected to generate an increase in total unrecognized tax benefits.

Earnings in Equity Interests. Earnings in equity interests for the three months ended March 31, 2009 was $49 million, as compared to $455 million for the same period in 2008. Earnings in equity interests for the first quarter of 2008 included a $401 million net non-cash gain related to Alibaba Group Holding Limited's ("Alibaba Group") initial public offering ("IPO") of Alibaba.com Limited ("Alibaba.com"), net of tax. In connection with the IPO, we made a direct investment of 1 percent in Alibaba.com. See Note 3 - "Investments in Equity Interests" in the Notes to the condensed consolidated financial statements for additional information.

Noncontrolling Interests. Noncontrolling interests represents the noncontrolling holders' percentage share of income or losses from the subsidiaries in which we hold a majority, but less than 100 percent, ownership interest and consolidate the subsidiaries' results in our condensed consolidated financial statements. . . .