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"), attracts hundreds of millions of users every month through our innovative technology and engaging content and services, making us one of the most trafficked Internet destinations and a world class online media company. Our vision is to be the center of people's online lives by delivering personally relevant, meaningful Internet experiences. Together with our owned and operated online properties and services ("Yahoo! Properties" or "Owned and Operated sites"), we 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 are designed to 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, principally 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 advertiser's link.

Third Quarter Results



                                             Three Months Ended September 30,        Dollar           Nine Months Ended September 30,         Dollar
Operating Results                               2008                 2009            Change              2008                 2009            Change
                                                                                         (In thousands)
Revenues                                  $       1,786,426    $       1,575,399   $ (211,027 )    $       5,402,113    $       4,728,338   $ (673,775 )
Income from operations                    $          70,174    $          91,499   $   21,325      $         291,312    $         267,937   $  (23,375 )




                                                        Nine Months Ended
                                                          September 30,                 Dollar
Cash Flow Results                                     2008              2009            Change
                                                                  (In thousands)
Net cash provided by operating activities         $  1,559,234      $    959,283      $ (599,951 )
Net cash used in investing activities             $ (1,072,542 )    $ (1,383,381 )    $ (310,839 )
Net cash provided by financing activities         $    222,506      $      7,846      $ (214,660 )

Our revenue decline of 12 percent for both the three and nine months ended September 30, 2009, compared to the same periods in 2008, 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 experienced 12 percent year over year declines for both periods. The declines in income from operations for the nine months ended September 30, 2009 reflect decreases in revenues partially offset by decreases in operating expenses of $479 million compared to the same periods in 2008. The decreases in operating expenses are primarily due to our cost reduction initiatives.

During the three months ended June 30, 2009, we implemented a new cost initiative to further reduce our worldwide workforce. For the three months ended September 30, 2009, we incurred a net pre-tax expense of $4 million related to this initiative and a net pre-tax expense of $13 million related to the Q408 restructuring plan.

Cash generated from our operations is a measure of the cash productivity of our business model. Our operating activities in the nine months ended September 30, 2009 generated adequate cash to meet our operating needs. Cash used in investing activities in the nine months ended September 30, 2009 included capital expenditures of $264 million and net purchases of marketable debt securities of $1.3 billion, offset by $265 million of proceeds received from the sales of marketable equity securities. Cash provided by financing activities included $74 million in proceeds from employee option exercises and employee stock purchases, offset by $91 million used in the direct repurchase of common stock and $46 million used for tax withholding payments related to the net share settlements of restricted stock units and tax-related reacquisition of shares of restricted stock. Net cash provided by operating activities during the nine months ended September 30, 2008 included a $350 million one-time payment related to a commercial arrangement entered into with AT&T Inc. No similar payments were received during the nine months ended September 30, 2009.

On July 29, 2009, Yahoo! entered into a binding letter agreement with Microsoft Corporation ("Microsoft") under which Microsoft will be Yahoo!'s exclusive technology provider for algorithmic and paid search services and Yahoo! will become the exclusive worldwide relationship sales force for both companies' premium search advertisers. During the 10-year term of the agreement, Yahoo! will be entitled to a revenue share based on the net revenues generated from Microsoft's services on Yahoo! Properties and Affiliate sites. Microsoft will acquire an exclusive 10-year license to Yahoo!'s core search technology and will have the ability to integrate Yahoo! search technology into its existing Web search platforms. The agreement does not cover either company's Web properties and products, email, instant messaging, display advertising, or any other aspect of the companies' businesses, and the companies will continue to compete in those areas. The transaction is subject to regulatory review.

Results of Operations

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



                                        Three Months Ended September 30,           Percent           Nine Months Ended September 30,           Percent
                                        2008       (*)         2009       (*)      Change           2008       (*)         2009       (*)      Change
Marketing services:
Owned and Operated sites            $  1,002,032    56 %    $   851,382    54 %        (15 %)    $ 2,983,360    55 %    $ 2,581,445    55 %        (13 %)
Affiliate sites                          560,690    31 %        525,966    33 %         (6 %)      1,738,762    32 %      1,556,934    33 %        (10 %)

Marketing services                     1,562,722    87 %      1,377,348    87 %        (12 %)      4,722,122    87 %      4,138,379    88 %        (12 %)
Fees                                     223,704    13 %        198,051    13 %        (11 %)        679,991    13 %        589,959    12 %        (13 %)

Total revenues                      $  1,786,426   100 %    $ 1,575,399   100 %        (12 %)    $ 5,402,113   100 %    $ 4,728,338   100 %        (12 %)

(*) 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 December 31, 2009 compared to the three months ended December 31, 2008 due primarily to the economic environment as well as our ongoing advertiser quality initiatives. Adverse economic conditions have caused some advertisers to spend less on online advertising which could negatively affect the growth rate of our revenues. In addition, fluctuation of the U.S. dollar against other currencies could have a 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 and nine months ended September 30, 2009 decreased by 15 percent and 13 percent, respectively, as compared to the same periods 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 September 30, 2009, revenues from search advertising and display advertising on Owned and Operated sites declined 19 percent and 8 percent, respectively, compared to the same period in 2008. For the nine months ended September 30, 2009, revenues from search and display advertising on Owned and Operated sites declined 13 percent and 12 percent, respectively, compared to the same period in 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 in both search and display advertising and a shift towards non-commercial search terms have 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. For the three and nine months ended September 30, 2009, Page Views increased 5 percent and 7 percent, respectively, compared to the same periods in 2008. Revenue per Page View decreased 19 percent for both the three and nine months ended September 30, 2009, as compared to the same periods in 2008. 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 and nine months ended September 30, 2009 decreased 6 percent and 10 percent, respectively, as compared to the same periods in 2008. The number of searches on Affiliate sites increased by approximately 23 percent and 28 percent, respectively, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. Although increased traffic has contributed to a higher volume of search queries on our Affiliate network, lower advertising spending and a shift towards non-commercial search terms have resulted in decreased revenues. The average revenue per search on our Affiliate sites decreased by 23 percent and 30 percent, respectively, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008.

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 and nine months ended September 30, 2009 decreased 11 percent and 13 percent, respectively, as compared to the same periods in 2008. The decrease in fees revenues for the three and nine months ended September 30, 2009 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 and from outsourced business lines.

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 8.7 million as of September 30, 2009 compared to 10.8 million as of September 30, 2008, a decrease of 19 percent as a result of the business model changes described above. Average monthly revenues per fee-paying user was approximately $3.50 for both the three and nine months ended September 30, 2009, compared to approximately $4.00 for the same periods in 2008. Average monthly revenues per fee-paying user decreased for the three and nine months ended September 30, 2009 compared to the same periods in 2008 due to the change in the mix of fee-based subscribers, primarily due to the outsourced business lines.

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 Ended September 30,             Dollar        Percent
                                             2008       (*)         2009       (*)        Change        Change
Cost of revenues                         $    772,277    43 %    $   708,898    45 %    $  (63,379 )         (8 )%
Sales and marketing                      $    396,982    22 %    $   286,382    18 %    $ (110,600 )        (28 )%
Product development                      $    323,172    18 %    $   306,696    19 %    $  (16,476 )         (5 )%
General and administrative               $    199,593    11 %    $   155,421    10 %    $  (44,172 )        (22 )%
Amortization of intangibles              $     24,228     1 %    $     9,814     1 %    $  (14,414 )        (59 )%
Restructuring charges, net               $         -     -       $    16,689     1 %    $   16,689          100 %

                                              Nine Months Ended September 30,             Dollar        Percent
                                             2008       (*)         2009       (*)        Change        Change
Cost of revenues                         $  2,293,271    42 %    $ 2,122,088    45 %    $ (171,183 )         (7 )%
Sales and marketing                      $  1,226,472    23 %    $   887,880    19 %    $ (338,592 )        (28 )%
Product development                      $    943,497    17 %    $   904,137    19 %    $  (39,360 )         (4 )%
General and administrative               $    559,484    10 %    $   431,070     9 %    $ (128,414 )        (23 )%
Amortization of intangibles              $     71,192     1 %    $    28,734     1 %    $  (42,458 )        (60 )%
Restructuring charges, net               $     16,885     0 %    $    86,492     2 %    $   69,607          412 %

(*) Percent of total revenues.

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

                                             Three Months Ended September 30,          Nine Months Ended September 30,
                                                2008                 2009               2008                    2009
Cost of revenues                          $           4,283    $           2,688   $        11,112         $         8,930
Sales and marketing                                  51,060               30,150           172,904                 115,698
Product development                                  55,372               57,964           149,896                 163,889
General and administrative                           21,884               23,628            59,144                  65,159
Restructuring expense reversals                          -                    -            (12,284 )                (7,600 )

Total stock-based compensation expense    $         132,599    $         114,430   $       380,772         $       346,076

For additional information about stock-based compensation, see Note 10 - "Stock-Based Compensation" in the Notes to the condensed consolidated financial statements elsewhere in this 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 September 30, 2009 compared to the three months ended September 30, 2008 are comprised of the following (in thousands):

                                                            Information       Depreciation and
                                        Compensation        Technology          Amortization          Facilities          TAC           Other          Total
Cost of revenues                       $       (5,696 )    $      (6,931 )    $         (26,598 )    $         65      $ (17,143 )    $  (7,076 )    $  (63,379 )
Sales and marketing                           (68,195 )           (1,008 )                 (184 )          (6,072 )           -         (35,141 )      (110,600 )
Product development                           (19,433 )            1,263                 12,491            (3,329 )           -          (7,468 )       (16,476 )
General and administrative                    (13,094 )             (328 )               (1,150 )             645             -         (30,245 )       (44,172 )
Amortization of intangibles                        -                  -                 (14,414 )              -              -              -          (14,414 )
Restructuring charges, net                         -                  -                      -                 -              -          16,689          16,689

Total                                  $     (106,418 )    $      (7,004 )    $         (29,855 )    $     (8,691 )    $ (17,143 )    $ (63,241 )    $ (232,352 )

The changes in operating costs and expenses for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 are comprised of the following (in thousands):

                                                          Information       Depreciation and
                                      Compensation        Technology          Amortization          Facilities          TAC           Other           Total
Cost of revenues                     $      (10,966 )    $     (19,328 )    $         (25,776 )    $     (1,981 )    $ (74,457 )    $  (38,675 )    $ (171,183 )
Sales and marketing                        (198,050 )             (387 )                  590           (14,350 )           -         (126,395 )      (338,592 )
Product development                         (42,487 )           (5,094 )               29,403            (4,504 )           -          (16,678 )       (39,360 )
General and administrative                  (46,256 )             (594 )               (3,172 )           2,223             -          (80,615 )      (128,414 )
Amortization of intangibles                      -                  -                 (42,458 )              -              -               -          (42,458 )
Restructuring charges, net                       -                  -                      -                 -              -           69,607          69,607

Total                                $     (297,759 )    $     (25,403 )    $         (41,413 )    $    (18,612 )    $ (74,457 )    $ (192,756 )    $ (650,400 )

Compensation Expense. Total compensation expense decreased $106 million and $298 million, respectively, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The decreases were primarily due to decreases in our total headcount across all functions, primarily the sales and marketing function, as a result of our cost initiatives.

Information Technology. Information technology expense decreased $7 million and $25 million, respectively, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The decreases were due to decreased telecom usage as well as decreased equipment spending.

Depreciation and Amortization. Depreciation and amortization expense decreased $30 million and $41 million, respectively, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The decreases were due to decreased amortization expense for fully amortized intangible assets acquired in prior years slightly offset by increased investments in information technology equipment and server equipment.

Facilities. Facilities expense decreased $9 million and $19 million, respectively, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The decrease was primarily due to the consolidation of our real estate facilities as part of our cost initiatives.

TAC. TAC decreased $17 million and $74 million, respectively, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The decrease was primarily driven by the impact of foreign currency rate fluctuations, offset by changes in Affiliate mix and a small increase in average TAC rates.

Other Expenses. Other expenses decreased $63 million and $193 million, respectively, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The decrease for the three months ended September 30, 2009 from the same period in 2008 was mainly due to decreases in third-party service provider expenses of $47 million, decreases in marketing-related expenses of $9 million, and decreases in employee travel and entertainment expenses of $9 million, offset by increases in restructuring charges, net of $17 million. The decrease for the nine months ended September 30, 2009 from the same period in 2008 was mainly due to decreases in third-party service provider expenses of $104 million, decreases in marketing-related expenses of $69 million, decreases in employee travel and entertainment expenses of $42 million, and decreases in content costs of $43 million, offset by increases in restructuring charges, net of $70 million. The decreases in marketing-related expenses were due to fewer total marketing ad campaigns and advertising expenses during the three and nine months ended September 30, 2009 as compared to the same periods in 2008. At the end of the . . .