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 revenue, including display, search, and other revenue;

• expectations about growth in users;

• expectations about operating expenses;

• anticipated capital expenditures;

• expectations about the implementation and the financial and operational impacts of our Search Agreement with Microsoft;

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

• projections and estimates with respect to our restructuring activities and changes to our organizational structure;

• expectations about the closure of our Korean operations;

• expectations about the amount of unrecognized tax benefits, the adequacy of our existing tax reserves and future tax expenditures; 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 ("Yahoo!", the "Company", "we", or "us"), is focused on creating deeply personal digital experiences that keep more than half a billion people connected to what matters most to them, across devices and around the globe. Our unique combination of Science + Art + Scale connects advertisers to the consumers who build their businesses. We provide online properties and services ("Yahoo! Properties") to users as well as a range of marketing services designed to reach and connect with those users on Yahoo! Properties and through a distribution network of third-party entities ("Affiliates"). These Affiliates integrate our advertising offerings into their Websites or other offerings (those Websites and other offerings, "Affiliate sites").

Initial Repurchase of Alibaba Group Holding Limited Ordinary Shares

On September 18, 2012 (the "Repurchase Closing Date"), Alibaba Group repurchased (the "Initial Repurchase") 523 million of the 1,047 million ordinary shares of Alibaba Group ("Shares") owned by us. The Initial Repurchase was made pursuant to the terms of the Share Repurchase and Preference Share Sale Agreement entered into by Yahoo! Inc., Alibaba Group and Yahoo! Hong Kong Holdings Limited, a Hong Kong corporation and wholly-owned subsidiary of Yahoo! Inc. ("YHK") on May 20, 2012 (as amended on September 11, 2012, the "Repurchase Agreement"). We received $13.54 per Share, or approximately $7.1 billion in total consideration, for the 523 million Shares sold to Alibaba Group. Approximately $6.3 billion of the consideration was received in cash and $800 million was received in Alibaba Group preference shares (the "Alibaba Group Preference Shares"). This Initial Repurchase resulted in a pre-tax gain of approximately $4.6 billion for the three months ended September 30, 2012 which is included in other income, net on the condensed consolidated statements of income.

On the Repurchase Closing Date, Alibaba Group paid us $550 million in satisfaction of certain future royalty payments under our existing Technology and Intellectual Property License Agreement ("TIPLA") with Alibaba Group. In addition, certain existing contractual limitations on our ability to compete in the People's Republic of China were terminated.

Net cash proceeds after the payment of taxes and fees from the Initial Repurchase and the $550 million TIPLA payment were approximately $4.3 billion. We intend to return $3 billion of the after-tax proceeds to shareholders. This amount is in addition to the $646 million we have already returned to shareholders through share repurchases since the announcement of the Repurchase Agreement on May 20, 2012 through September 30, 2012.

At the time of an initial public offering of Alibaba Group meeting certain specified criteria ("Qualified IPO"), Yahoo! and YHK will sell, at Alibaba Group's election (either directly to Alibaba Group or in the Qualified IPO), up to an additional 261.5 million of our remaining Shares. If Shares are sold back to Alibaba Group in the Qualified IPO, the purchase price per Share will be equal to the per share price in the Qualified IPO less specified fees and underwriter discounts.

See Note 4 - "Investments in Equity Interests" in the Notes to the condensed consolidated financial statements for additional information.

Closure of Korea Business. On October 18, 2012, we began notifying employees whose employment will be terminated as a result of our plan to close our Korean business by December 31, 2012. The decision is part of our effort to streamline our operations and focus our resources. Approximately 200 employees will be terminated as part of the closure of the Korean business.

We expect to incur pre-tax cash charges related to our plan to close our Korean business for severance pay expenses, lease and other contract termination charges. Total charges are expected to include these cash charges and also non-cash charges related to the write-off of goodwill and other assets related to our Korea business. We expect we will incur pre-tax cash charges of approximately $5 million related to severance pay expenses and approximately $2 million related to lease termination charges. We also expect to recognize pre-tax non-cash charges related to goodwill and other asset impairments totaling approximately $87 million. We expect to recognize the majority of the total pre-tax charges in the quarter ending December 31, 2012. We are unable at this time to estimate the other contract termination charges, the amount of total cash charges or the total charges we will incur.

Third Quarter Highlights



                                          Three Months Ended                              Nine Months Ended
                                             September 30,             Dollar               September 30,              Dollar
Operating Highlights                     2011            2012          Change           2011            2012           Change
                                                                           (In thousands)
Revenue                               $ 1,216,665     $ 1,201,732     $ (14,933 )    $ 3,660,046     $ 3,640,759     $  (19,287 )
Income from operations                $   177,254     $   152,189     $ (25,065 )    $   557,894     $   376,378     $ (181,516 )




                                                        Nine Months Ended
                                                          September 30,                Dollar
Cash Flow Results                                     2011             2012            Change
                                                                  (In thousands)
Net cash provided by operating activities         $    892,472      $ 1,618,321      $   725,849
Net cash provided by investing activities         $    153,493      $ 5,002,336      $ 4,848,843
Net cash used in financing activities             $ (1,095,474 )    $  (620,824 )    $   474,650

Our revenue decreased one percent for both the three and nine months ended September 30, 2012 compared to the same periods in 2011. This can be attributed primarily to a decrease in other revenue, which was partially offset by an increase in search revenue. Income from operations decreased 14 percent and 33 percent for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. The decrease in income from operations is due to the decline in revenue as well as an increase in operating expenses primarily driven by an increase in restructuring charges of $27 million and $151 million for the three and nine months ended September 30, 2012, respectively.

Cash generated by operating activities is a measure of the cash productivity of our business model. Our operating activities in the nine months ended September 30, 2012 generated adequate cash to meet our operating needs. Cash, cash equivalents, and investments in marketable debt securities were $9.4 billion at September 30, 2012 compared to $2.5 billion at December 31, 2011, an increase of $6.9 billion. The increase is due to cash proceeds, net of fees, of $6.2 billion received from the sale of Alibaba Group Shares and $550 million from the TIPLA payment. This was partially offset by the repurchase of approximately 46 million shares of our outstanding common stock for $716 million during the nine months ended September 30, 2012.

Search Agreement with Microsoft Corporation

On December 4, 2009, we entered into a Search and Advertising Services and Sales Agreement (the "Search Agreement") with Microsoft Corporation ("Microsoft"), which provides for Microsoft to be the exclusive algorithmic and paid search services provider on Yahoo! Properties and non-exclusive provider of such services on Affiliate sites. We also entered into a License Agreement with Microsoft pursuant to which Microsoft acquired an exclusive 10-year license to our core search technology that it will be able to integrate into its existing Web search platforms.

During the first five years of the Search Agreement, in the transitioned markets, we are entitled to receive 88 percent of the revenue generated from Microsoft's services on Yahoo! Properties. We are also entitled to receive 88 percent of the revenue generated

from Microsoft's services on Affiliate sites after the Affiliate's share of revenue. In the transitioned markets, for search revenue generated from Microsoft's services on Yahoo! Properties and Affiliate sites, we report as revenue the 88 percent revenue share, as we are not the primary obligor in the arrangement with the advertisers and publishers.

Under the Search Agreement, for each market, Microsoft generally guarantees Yahoo!'s revenue per search ("RPS Guarantee") on Yahoo! Properties only for 18 months after the transition of paid search services to Microsoft's platform in that market. In the fourth quarter of 2011, Microsoft agreed to extend the RPS Guarantee in the U.S. and Canada through March 2013. The RPS Guarantee is calculated based on the difference in revenue per search ("RPS") between the pre-transition and post-transition periods and certain other factors. We record the RPS Guarantee as search revenue in the quarter the amount becomes fixed, which is typically the quarter in which the associated shortfall in revenue per search occurred. If the RPS Guarantee is not renewed prior to its expiration on March 31, 2013, we currently anticipate that our revenue, cash flows and income will be negatively impacted.

Under the Search Agreement, Microsoft agreed to reimburse us for certain transition costs up to an aggregate total of $150 million during the first three years of the Search Agreement. Our results for the three and nine months ended September 30, 2011 reflect transition cost reimbursements from Microsoft under the Search Agreement that were equal to transition costs of $4 million and $27 million, respectively, incurred by Yahoo! related to the Search Agreement in the those periods. During the third quarter of 2011, our cumulative transition costs exceeded Microsoft's $150 million reimbursement cap under the Search Agreement. Transition costs we incur in excess of the $150 million reimbursement cap are not subject to reimbursement.

From February 23, 2010 until the applicable services are fully transitioned to Microsoft in all markets, Microsoft will also reimburse us for the costs of operating algorithmic and paid search services subject to specified exclusions and limitations. The Company's results reflect search operating cost reimbursements from Microsoft under the Search Agreement of $53 million and $164 million for the three and nine months ended September 30, 2011, and $17 million and $51 million for the three and nine months ended September 30, 2012, respectively. The global transition of the algorithmic and paid search platforms to Microsoft's platform and the migration of the paid search advertisers and publishers to Microsoft's platform are being done on a market by market basis. Search operating cost reimbursements are expected to decline as we fully transition all markets and, in the long term, the underlying expenses are not expected to be incurred under our cost structure.

We completed the transition of our algorithmic and paid search platforms to the Microsoft platform in the U.S. and Canada in the fourth quarter of 2010. In 2011, we completed the transition of algorithmic search in all other markets and the transition of paid search in India. In the second quarter of 2012, we completed the transition of paid search in certain EMEA (Europe, Middle East, and Africa) markets, including the United Kingdom, France, and Germany. During October 2012, we transitioned paid search in several additional markets. We have recently determined to re-evaluate the schedule for the transition of paid search in the remaining markets in order to work with Microsoft on improving the RPS in the transitioned markets. The market-by-market transition of our paid search platform to Microsoft's platform and the migration of paid search advertisers and publishers to Microsoft's platform are expected to continue through 2013, and possibly into 2014.

We record receivables for the reimbursements as costs are incurred and apply them against the operating expense categories in which the costs were incurred. Of the total amounts incurred during the year ended December 31, 2011, total reimbursements of $16 million not yet received from Microsoft were classified as part of prepaid expenses and other current assets on our condensed consolidated balance sheets as of December 31, 2011. For the third quarter of 2012, a total of $17 million of search operating cost reimbursements had been incurred by us related to the Search Agreement. Of that amount, $6 million had not been received from Microsoft and was classified as part of prepaid expenses and other current assets on our condensed consolidated balance sheets as of September 30, 2012.

See Note 15 - "Search Agreement with Microsoft Corporation" in the Notes to the condensed consolidated financial statements for additional information.

Results of Operations

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



                                      Three Months Ended September 30,               Percent                Nine Months Ended September 30,                Percent
                                 2011          (*)          2012          (*)        Change            2011          (*)          2012          (*)        Change
Display                       $   502,102        42 %    $   506,002        42 %            1 %     $ 1,548,262        42 %    $ 1,552,191        43 %            0 %
Search                            466,785        38 %        472,537        39 %            1 %       1,388,580        38 %      1,403,903        38 %            1 %
Other                             247,778        20 %        223,193        19 %          (10 )%        723,204        20 %        684,665        19 %           (5 )%

Total revenue                 $ 1,216,665       100 %    $ 1,201,732       100 %           (1 )%    $ 3,660,046       100 %    $ 3,640,759       100 %           (1 )%

(*) Percent of total revenue.

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

                                               Three Months Ended September 30,              Dollar         Percent
                                            2011          (*)         2012        (*)        Change         Change
Cost of revenue - TAC                    $   144,991        12 %    $ 112,829        9 %    $ (32,162 )          (22 )%
Cost of revenue - Other                  $   239,002        20 %    $ 282,081       23 %    $  43,079             18 %
Sales and marketing                      $   290,520        24 %    $ 269,272       22 %    $ (21,248 )           (7 )%
Product development                      $   229,230        19 %    $ 217,301       18 %    $ (11,929 )           (5 )%
General and administrative               $   129,954        11 %    $ 135,249       11 %    $   5,295              4 %
Amortization of intangibles              $     8,435         1 %    $   8,084        1 %    $    (351 )           (4 )%
Restructuring charges, net               $    (2,721 )       0 %    $  24,727        2 %    $  27,448             N/ M




                                               Nine Months Ended September 30,              Dollar         Percent
                                            2011         (*)         2012        (*)        Change         Change
Cost of revenue - TAC                    $   447,918       12 %    $ 393,945       11 %    $ (53,973 )          (12 )%
Cost of revenue - Other                  $   720,017       20 %    $ 814,513       22 %    $  94,496             13 %
Sales and marketing                      $   832,827       23 %    $ 827,450       23 %    $  (5,377 )           (1 )%
Product development                      $   683,558       19 %    $ 645,407       18 %    $ (38,151 )           (6 )%
General and administrative               $   384,674       11 %    $ 395,637       11 %    $  10,963              3 %
Amortization of intangibles              $    25,067        1 %    $  27,893        1 %    $   2,826             11 %
Restructuring charges, net               $     8,091        0 %    $ 159,536        4 %    $ 151,445             N/ M

(*) Percent of total revenue.

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

                                                    Three Months Ended           Nine Months Ended
                                                       September 30,               September 30,
                                                     2011          2012         2011           2012
Cost of revenue - Other                           $      956     $  2,363     $   2,479      $   7,871
Sales and marketing                                   16,759       19,876        42,829         59,954
Product development                                   21,093       17,050        64,296         54,329
General and administrative                            12,139       22,077        35,507         44,749
Restructuring expense reversals, net                      -            -         (1,278 )       (3,429 )

Total stock-based compensation expense            $   50,947     $ 61,366     $ 143,833      $ 163,474

For additional information about stock-based compensation, see Note 10 - "Stockholders' Equity and Employee Benefits" in the Notes to the condensed consolidated financial statements included 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, 2011 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."

We continue to manage our business geographically. The primary areas of measurement and decision-making are currently Americas, EMEA, and Asia Pacific. Management relies on an internal reporting process that provides revenue ex-TAC, which is defined as revenue less TAC, direct costs excluding TAC by segment, and consolidated income from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, our segments.

Summarized information by segment was as follows (dollars in thousands):

                                             Three Months Ended                                       Nine Months Ended
                                      September 30,       September 30,       Percent         September 30,       September 30,       Percent
                                          2011                2012            Change              2011                2012            Change
Revenue by segment:
Americas                             $       791,240     $       843,731             7 %     $     2,418,209     $     2,501,515             3 %
EMEA                                         148,494              96,473           (35 )%            465,145             358,534           (23 )%
Asia Pacific                                 276,931             261,528            (6 )%            776,692             780,710             1 %

Total revenue                        $     1,216,665     $     1,201,732            (1 )%    $     3,660,046     $     3,640,759            (1 )%

                                                 Three Months Ended                                       Nine Months Ended
                                         September 30,        September 30,       Percent         September 30,       September 30,       Percent
                                             2011                 2012            Change              2011                2012            Change
TAC by segment:
Americas                                $        37,493      $        41,289            10 %     $       115,038     $       130,154            13 %
EMEA                                             52,197               17,399           (67 )%            167,357              97,248           (42 )%
Asia Pacific                                     55,301               54,141            (2 )%            165,523             166,543             1 %

Total TAC                               $       144,991      $       112,829           (22 )%    $       447,918     $       393,945           (12 )%

Revenue ex-TAC by segment:
Americas                                $       753,747      $       802,442             6 %     $     2,303,171     $     2,371,361             3 %
EMEA                                             96,297               79,074           (18 )%            297,788             261,286           (12 )%
Asia Pacific                                    221,630              207,387            (6 )%            611,169             614,167             0 %

Total revenue ex-TAC                    $     1,071,674      $     1,088,903             2 %     $     3,212,128     $     3,246,814             1 %

Direct costs by segment(1):
Americas                                        174,697              189,345             8 %             508,637             550,080             8 %
EMEA                                             42,761               39,167            (8 )%            124,135             120,665            (3 )%
Asia Pacific                                     61,006               56,329            (8 )%            170,057             164,068            (4 )%
Global operating costs(2)(3)                    415,507              396,269            (5 )%          1,224,169           1,228,686             0 %
Restructuring charges, net                       (2,721 )             24,727            N/ M               8,091             159,536            N/ M
Depreciation and amortization                   152,223              169,511            11 %             474,034             480,498             1 %
Stock-based compensation expense                 50,947               61,366            20 %             145,111             166,903            15 %

Income from operations                  $       177,254      $       152,189           (14 )%    $       557,894     $       376,378           (33 )%

N/M = Not meaningful

(1) Direct costs for each segment include cost of revenue-other, as well as other operating expenses that are directly attributable to the segment such as employee compensation expense (excluding stock-based compensation expense), local sales and marketing expenses, and facilities expenses. Beginning in 2012, marketing and customer advocacy costs are managed locally and included as direct costs for each segment. Prior period amounts have been revised to conform to the current presentation.

(2) Global operating costs include product development, service engineering and operations, general and administrative, and other corporate expenses that are managed on a global basis and that are not directly attributable to any particular segment. Prior to 2012, marketing and customer advocacy costs were managed on a global basis and included as global operating costs. Prior period amounts have been revised to conform to the current presentation.

(3) The net cost reimbursements from Microsoft pursuant to the Search Agreement are primarily included in global operating costs.

Revenue

We currently generate revenue principally from display advertising on Yahoo! Properties and from search advertising on Yahoo! Properties and Affiliate sites.

To assist us in evaluating display advertising and search advertising, beginning in the fourth quarter of 2010, we began reporting the number of Web pages viewed by users ("Page Views") separately for display and search. "Search Page Views" is defined as the number of Web pages viewed by users on Yahoo! Properties and Affiliate sites resulting from search queries, and "revenue per Search Page View" is defined as search revenue divided by our Search Page Views. "Display Page Views" is defined as the total number of Page Views on Yahoo! Properties less the number of Search Page Views on Yahoo! Properties, and "revenue per Display Page View" is defined as display revenue divided by our Display Page Views. While we also receive display revenue for content match links (advertising in the form of contextually relevant links to advertisers' Websites) on Yahoo! Properties and Affiliate sites and for display advertising on Affiliate sites, we do not include that revenue or those Page Views in our discussion or calculation of Display Page Views or revenue per Display Page View because the net revenue and related volume metrics associated with them are not currently material to display revenue.

We periodically review and refine our methodology for monitoring, gathering, and counting Page Views on Yahoo! Properties. Based on this process, from time to . . .