10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

Or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 000-28018

Yahoo! Inc.

(Exact name of Registrant as specified in its charter)

Delaware	77-0398689
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

701 First Avenue

Sunnyvale, California 94089

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (408) 349-3300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at July 30, 2010
Common Stock, $0.001 par value	1,348,278,127

YAHOO! INC.

Table of Contents

PART I	FINANCIAL INFORMATION	3
Item 1.	Condensed Consolidated Financial Statements (unaudited)	3
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2010	3
	Condensed Consolidated Balance Sheets as of December 31, 2009 and June 30, 2010	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2010	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34
PART II	OTHER INFORMATION	35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 5.	Other Information	46
Item 6.	Exhibits	46
	Signatures	47

2

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

YAHOO! INC.

Condensed Consolidated Statements of Income

	Three Months Ended						Six Months Ended
	June 30, 2009			June 30, 2010			June 30, 2009			June 30, 2010
	(Unaudited, in thousands except per share amounts)
Revenue	$	1,572,897		$	1,601,379		$	3,152,939		$	3,198,339
Cost of revenue		712,453			682,722			1,413,190			1,389,104
Gross profit		860,444			918,657			1,739,749			1,809,235
Operating expenses:
Sales and marketing		280,386			331,468			601,498			645,006
Product development		291,398			268,552			597,441			534,629
General and administrative		138,652			125,333			275,649			235,761
Amortization of intangibles		9,253			7,880			18,920			15,982
Restructuring charges, net		65,002			10,052			69,803			14,464
Total operating expenses		784,691			743,285			1,563,311			1,445,842
Income from operations		75,753			175,372			176,438			363,393
Other income, net		72,010			12,588			76,970			98,916
Income before income taxes and earnings in equity interests		147,763			187,960			253,408			462,309
Provision for income taxes		(68,879	)		(68,524	)		(104,763	)		(117,968	)
Earnings in equity interests		64,156			96,707			113,090			184,081
Net income		143,040			216,143			261,735			528,422
Less: Net income attributable to noncontrolling interests		(1,653	)		(2,822	)		(2,790	)		(4,910	)
Net income attributable to Yahoo! Inc.	$	141,387		$	213,321		$	258,945		$	523,512
Net income attributable to Yahoo! Inc. common stockholders per share — basic	$	0.10		$	0.15		$	0.19		$	0.38
Net income attributable to Yahoo! Inc. common stockholders per share — diluted	$	0.10		$	0.15		$	0.18		$	0.37
Shares used in per share calculation — basic		1,394,783			1,378,374			1,393,155			1,388,341
Shares used in per share calculation — diluted		1,414,295			1,390,240			1,410,348			1,401,836
Stock-based compensation expense by function:
Cost of revenue	$	2,663		$	580		$	6,242		$	1,591
Sales and marketing	$	35,651		$	21,540		$	85,548		$	35,218
Product development	$	51,647		$	26,132		$	105,925		$	58,505
General and administrative	$	22,565		$	9,345		$	41,531		$	23,066
Restructuring expense reversals	$	(7,600	)	$	—		$	(7,600	)	$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

YAHOO! INC.

Condensed Consolidated Balance Sheets

	December 31, 2009			June 30, 2010
	(Unaudited, in thousands except par values)
ASSETS
Current assets:
Cash and cash equivalents	$	1,275,430		$	1,183,325
Short-term marketable debt securities		2,015,655			1,576,276
Accounts receivable, net		1,003,362			921,636
Prepaid expenses and other current assets		300,325			366,855
Total current assets		4,594,772			4,048,092
Long-term marketable debt securities		1,226,919			1,039,327
Property and equipment, net		1,426,862			1,517,891
Goodwill		3,640,373			3,640,659
Intangible assets, net		355,883			288,282
Other long-term assets		194,933			216,072
Investments in equity interests		3,496,288			3,601,511
Total assets	$	14,936,030		$	14,351,834
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	136,769		$	132,478
Accrued expenses and other current liabilities		1,169,815			960,452
Deferred revenue		411,144			346,829
Total current liabilities		1,717,728			1,439,759
Long-term deferred revenue		122,550			82,113
Capital lease and other long-term liabilities		83,021			140,087
Deferred and other long-term tax liabilities, net		494,095			525,321
Total liabilities		2,417,394			2,187,280
Commitments and contingencies (Note 11)		—			—
Yahoo! Inc. stockholders’ equity:
Common stock, $0.001 par value; 5,000,000 shares authorized; 1,413,718 shares issued and 1,406,075 shares outstanding as of December 31, 2009 and 1,425,919 shares issued and 1,361,583 shares outstanding as of June 30, 2010		1,410			1,423
Additional paid-in capital		10,640,367			10,804,220
Treasury stock at cost, 7,643 shares as of December 31, 2009 and 64,336 shares as of June 30, 2010		(117,331	)		(998,748	)
Retained earnings		1,599,638			2,123,150
Accumulated other comprehensive income		369,236			204,283
Total Yahoo! Inc. stockholders’ equity		12,493,320			12,134,328
Noncontrolling interests		25,316			30,226
Total equity		12,518,636			12,164,554
Total liabilities and equity	$	14,936,030		$	14,351,834

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

YAHOO! INC.

Condensed Consolidated Statements of Cash Flows

	Six Months Ended
	June 30, 2009			June 30, 2010
	(Unaudited, in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	261,735		$	528,422
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		273,502			255,192
Amortization of intangible assets		105,811			68,024
Stock-based compensation expense, net		231,646			118,380
Non-cash restructuring charges		6,467			72
Tax benefits from stock-based awards		16,536			21,922
Excess tax benefits from stock-based awards		(67,186	)		(64,014	)
Deferred income taxes		24,741			28,903
Earnings in equity interests		(113,090	)		(184,081	)
Dividends received from equity investee		26,145			60,918
Gain from sales of investments, assets, and other, net		(72,243	)		(52,581	)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net		163,262			60,323
Prepaid expenses and other		4,618			(67,267	)
Accounts payable		(69,621	)		1,440
Accrued expenses and other liabilities		(139,378	)		(208,589	)
Deferred revenue		(48,802	)		(76,500	)
Net cash provided by operating activities		604,143			490,564
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net		(165,155	)		(302,811	)
Purchases of marketable debt securities		(2,173,606	)		(1,367,688	)
Proceeds from sales of marketable debt securities		56,159			507,364
Proceeds from maturities of marketable debt securities		1,439,837			1,460,172
Proceeds from sales of marketable equity securities		119,987			—
Acquisitions, net of cash acquired		—			(112,361	)
Purchases of intangible assets		(21,751	)		(12,617	)
Proceeds from the sale of a divested business		—			100,000
Other investing activities, net		(86	)		(18,846	)
Net cash (used in) provided by investing activities		(744,615	)		253,213
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net		71,052			83,604
Repayments of capital lease obligations		—			(804	)
Repurchases of common stock		—			(881,317	)
Excess tax benefits from stock-based awards		67,186			64,014
Tax withholdings related to net share settlements of restricted stock awards and restricted stock units		(26,618	)		(40,739	)
Net cash provided by (used in) financing activities		111,620			(775,242	)
Effect of exchange rate changes on cash and cash equivalents		20,642			(60,640	)
Net change in cash and cash equivalents		(8,210	)		(92,105	)
Cash and cash equivalents at beginning of period		2,292,296			1,275,430
Cash and cash equivalents at end of period	$	2,284,086		$	1,183,325

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company. Yahoo! Inc., together with its consolidated subsidiaries (“Yahoo!” or the “Company”), attracts hundreds of millions of users every month through its innovative technology and engaging content and services, making it one of the most trafficked Internet destinations and a world class online media company. Yahoo!’s vision is to be the center of people’s online lives by delivering personally relevant, meaningful Internet experiences. Together with the Company’s owned and operated online properties and services (“Yahoo! Properties” or “Owned and Operated sites”), Yahoo! also provides its advertising offerings and access to Internet users beyond Yahoo! through its distribution network of third-party entities (“Affiliates”), who have integrated the Company’s advertising offerings into their Websites, referred to as Affiliate sites, or their other offerings. The Company generates revenue by providing marketing services to advertisers across a majority of Yahoo! Properties and Affiliate sites. Additionally, although many of the services the Company provides to users are free, Yahoo! does charge fees for a range of premium services.

Basis of Presentation. The condensed consolidated financial statements include the accounts of Yahoo! Inc. and its majority-owned or otherwise controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the condensed consolidated balance sheets. The Company has included the results of operations of acquired companies from the closing date of the acquisition. Certain prior period amounts have been reclassified to conform to the current period presentation.

The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosure of contingent assets and liabilities. On a regular basis, the Company evaluates its estimates, including those related to uncollectible receivables, the useful lives of long-lived assets including property and equipment, investment fair values, stock-based compensation, goodwill and other intangible assets, income taxes, contingencies, and restructuring charges. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results may differ from these estimates.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted except for the Company’s change in revenue recognition policy pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2009 was derived from the Company’s audited financial statements for the year ended December 31, 2009, but does not include all disclosures required by U.S. GAAP. However, the Company believes the disclosures are adequate to make the information presented not misleading.

Revenue Recognition. In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standard for multiple deliverable revenue arrangements, which provided updated guidance on whether multiple deliverables exist, how deliverables in an arrangement should be separated, and how consideration should be allocated. This standard eliminates the use of the residual method and will require arrangement consideration to be allocated based on the relative selling price for each deliverable. The selling price for each arrangement deliverable can be established based on vendor specific objective evidence (“VSOE”) and third-party evidence (“TPE”) if VSOE is not available. The new standard provides additional flexibility to utilize an estimate of selling price (“ESP”) if neither VSOE nor TPE is available.

The Company elected to early adopt this accounting standard on January 1, 2010 on a prospective basis for applicable transactions originating or materially modified after December 31, 2009. The adoption of this standard did not have a significant impact on the Company’s revenue recognition for multiple deliverable arrangements. Upon adoption, the selling prices for certain custom advertising solutions may use the best estimate of selling price as provided under the new standard. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, cash flows, or results of operations for the three and six months ended June 30, 2010.

The Company’s revenue is derived principally from services, which comprise marketing services for advertisers and publishers and offerings to users. The Company classifies this revenue as marketing services and fees.

6

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the related fee is reasonably assured. The Company’s arrangements generally do not include a provision for cancellation, termination, or refunds that would significantly impact revenue recognition.

Marketing services revenue is generated from several offerings including the display of graphical advertisements (“display advertising”), the display of text-based links to an advertiser’s Website (“search advertising”), listing-based services, and commerce-based transactions.

The Company recognizes revenue from display advertising on Yahoo! Properties as “impressions” are delivered. An “impression” is delivered when an advertisement appears in pages viewed by users. Arrangements for these services generally have terms of up to one year and in some cases the terms may be up to three years.

The Company is beginning to offer customized display advertising solutions to advertisers. These customized display advertising solutions will combine the Company’s standard display advertising with customized content, customer insights, and campaign analysis. Due to the unique nature of these products, the Company may not be able to establish selling prices based on historical stand-alone sales or third party evidence, therefore the Company may use its best estimate to establish selling prices. The Company establishes best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as class of advertiser, size of transaction, seasonality, margin objectives, observed pricing trends, available online inventory, industry pricing strategies, and market conditions. The Company believes the use of the best estimates of selling price will allow revenue recognition in a manner consistent with the underlying economics of the transaction.

The Company also recognizes revenue from search advertising on Yahoo! Properties. Search advertising revenue is recognized as “click-throughs” occur. A “click-through” occurs when a user clicks on an advertiser’s search result listing.

Marketing services revenue also includes listings and transaction revenue. Listings revenue is generated from a variety of consumer and business listings-based services, including access to the Yahoo! HotJobs database and classified advertising such as Yahoo! Autos, Yahoo! Real Estate, and other services. The Company recognizes listings revenue when the services are performed. Transaction revenue is generated from facilitating commercial transactions through Yahoo! Properties, principally from Small Business, Yahoo! Travel and Yahoo! Shopping. The Company recognizes transaction revenue when there is evidence that qualifying transactions have occurred (for example, when travel arrangements are booked through Yahoo! Travel).

In addition to delivering search and display advertising on Yahoo! Properties, the Company also generates revenue from search and/or display advertising offerings on Affiliate sites. The Company pays Affiliates for the revenue generated from the display of these advertisements on the Affiliates’ Websites. These payments are called traffic acquisition costs (“TAC”). The revenue derived from these arrangements that involve traffic supplied by Affiliates is reported gross of the payment to Affiliates. This revenue is reported gross due to the fact that the Company is the primary obligor to the advertisers who are the customers of the advertising service.

Fees revenue consists of revenue generated from a variety of consumer and business fee-based services, including Internet broadband services, royalties received from joint venture partners, premium mail, music and personals offerings as well as services for small businesses. The Company recognizes fees revenue when the services are performed.

The Company accounts for cash consideration given to customers, for which it does not receive a separately identifiable benefit or cannot reasonably estimate fair value, as a reduction of revenue rather than as an expense. Cash consideration received in an arrangement with a provider may require consideration of classification of amounts received as revenue or a reimbursement of costs incurred. Additionally, the Company reports revenue for which it is the primary obligor in the arrangement and for which it provided a product or service at the gross amount.

Current deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition. Long-term deferred revenue includes amounts received from customers for which services will not be delivered within the next 12 months.

Note 2 BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO YAHOO! INC. COMMON STOCKHOLDERS PER SHARE

Basic and diluted net income attributable to Yahoo! common stockholders per share is computed using the weighted average number of common shares outstanding during the period, excluding net income attributable to participating securities (restricted stock awards granted under the Company’s 1995 Stock Plan and restricted stock units granted under the 1996 Directors’ Stock Plan (the “Directors’ Plan”)). Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares are calculated using the treasury stock method and consist of unvested restricted stock and shares underlying unvested restricted stock units, the incremental common shares issuable upon the exercise of stock options, and shares to be purchased under the employee stock purchase plan. The Company calculates potential tax windfalls and shortfalls by including the impact of pro forma deferred tax assets.

The Company takes into account the effect on consolidated net income per share of dilutive securities of entities in which the Company holds equity interests that are accounted for using the equity method.

7

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Potentially dilutive securities representing approximately 86 million shares of common stock for the three and six months ended June 30, 2010, respectively, and 133 million and 138 million shares of common stock for the three and six months ended June 30, 2009, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been anti-dilutive.

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):

	Three Months Ended						Six Months Ended
	June 30, 2009			June 30, 2010			June 30, 2009			June 30, 2010
Basic:
Numerator:
Net income attributable to Yahoo!	$	141,387		$	213,321		$	258,945		$	523,512
Less: Net income allocated to participating securities		(171	)		(55	)		(324	)		(103	)
Net income attributable to Yahoo! common stockholders — basic	$	141,216		$	213,266		$	258,621		$	523,409
Denominator:
Weighted average common shares		1,394,783			1,378,374			1,393,155			1,388,341
Net income attributable to Yahoo! common stockholders per share — basic	$	0.10		$	0.15		$	0.19		$	0.38
Diluted:
Numerator:
Net income attributable to Yahoo!	$	141,387		$	213,321		$	258,945		$	523,512
Less: Net income allocated to participating securities		(24	)		(19	)		(55	)		(41	)
Less: Effect of dilutive securities issued by equity investees		(219	)		(670	)		(445	)		(1,348	)
Net income attributable to Yahoo! common stockholders — diluted	$	141,144		$	212,632		$	258,445		$	522,123
Denominator:
Denominator for basic calculation		1,394,783			1,378,374			1,393,155			1,388,341
Weighted average effect of Yahoo! dilutive securities:
Restricted stock and restricted stock units		11,741			6,157			11,255			6,819
Stock options and employee stock purchase plan		7,771			5,709			5,938			6,676
Denominator for diluted calculation		1,414,295			1,390,240			1,410,348			1,401,836
Net income attributable to Yahoo! common stockholders per share — diluted	$	0.10		$	0.15		$	0.18		$	0.37

Note 3 ACQUISITIONS

During the six months ended June 30, 2010, the Company acquired three companies, which were accounted for as business combinations. The total purchase price for these acquisitions was $114 million. The total cash consideration of $114 million less cash acquired of $2 million resulted in a net cash outlay of $112 million. Of the purchase price, $75 million was preliminarily allocated to goodwill, $32 million to amortizable intangible assets, $17 million to tangible assets, $2 million to cash acquired, and $12 million to net assumed liabilities. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes. In connection with the acquisitions, the Company issued stock-based awards valued at $9 million, which is being recognized as stock-based compensation expense as the awards vest over a period of up to four years.

The Company’s business combinations completed during the six months ended June 30, 2010 did not have a material impact on the Company’s consolidated financial statements, and therefore pro forma disclosures have not been presented.

8

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Note 4 INVESTMENTS IN EQUITY INTERESTS

The following table summarizes the Company’s investments in equity interests (dollars in thousands):

	December 31, 2009		June 30, 2010		Percent Ownership of Common Stock
Alibaba Group	$	2,167,007	$	2,205,669	43	%
Yahoo Japan		1,329,281		1,395,842	35	%
Total	$	3,496,288	$	3,601,511

Equity Investment in Alibaba Group. The investment in Alibaba Group Holding Limited (“Alibaba Group”) is accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of investments in equity interests on the Company’s condensed consolidated balance sheets. The Company records its share of the results of Alibaba Group, and its consolidated subsidiaries, and any related amortization expense, one quarter in arrears, within earnings in equity interests in the condensed consolidated statements of income.

As of June 30, 2010, the difference between the Company’s carrying value of its investment in Alibaba Group and its proportionate share of Alibaba Group’s stockholders’ equity is summarized as follows (in thousands):

Carrying value of investment in Alibaba Group	$	2,205,669
Proportionate share of Alibaba Group stockholders’ equity		1,568,767
Excess of carrying value of investment over proportionate share of Alibaba Group’s stockholders’ equity(*)	$	636,902

^(*) The excess carrying value has been primarily assigned to goodwill.

The following tables present Alibaba Group’s U.S. GAAP condensed financial information, as derived from the Alibaba Group consolidated financial statements (in thousands):

	Three Months Ended					Six Months Ended
	March 31, 2009			March 31, 2010		March 31, 2009			March 31, 2010
Operating data:
Revenue	$	156,628		$	281,955	$	309,276		$	555,767
Gross profit	$	115,122		$	207,189	$	218,615		$	420,074
Income (loss) from operations(*)	$	1,934		$	35,548	$	(43,676	)	$	(133,574	)
Net income (loss)	$	4,545		$	45,013	$	(46,459	)	$	(100,212	)
Net (loss) income attributable to Alibaba Group	$	(5,423	)	$	32,060	$	(64,511	)	$	(124,636	)
						September 30, 2009			March 31, 2010
Balance sheet data:
Current assets						$	3,191,097		$	3,848,578
Long-term assets						$	2,308,099		$	2,252,401
Current liabilities						$	1,559,975		$	2,179,753
Long-term liabilities						$	25,815		$	48,913
Noncontrolling interests						$	185,055		$	225,207

^(*) The loss from operations of $134 million for the six months ended March 31, 2010 is primarily due to Alibaba Group’s impairment loss of $192 million on goodwill related to the business that Yahoo! contributed to Alibaba Group. This impairment does not impact Yahoo!’s earnings in equity interests as Yahoo!’s investment balance related to this contributed business was carried over at cost and therefore Yahoo! has no basis in the impaired goodwill.

The Company also has commercial arrangements with Alibaba Group to provide technical, development, and advertising services. For the three and six months ended June 30, 2009 and 2010, these transactions were not material.

Equity Investment in Yahoo Japan. The investment in Yahoo Japan Corporation (“Yahoo Japan”) is accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of investments in equity interests on the Company’s condensed consolidated balance sheets. The Company records its share of the results of Yahoo Japan, and its consolidated subsidiaries, and any related amortization expense, one quarter in arrears, within earnings in equity interests in the condensed consolidated statements of income.

9

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Differences between U.S. GAAP and accounting principles generally accepted in Japan (“Japanese GAAP”), the standards by which Yahoo Japan’s financial statements are prepared, did not materially impact the amounts reflected in the Company’s condensed consolidated financial statements. The Company does, however, make adjustments to the earnings in equity interests line in the condensed consolidated statements of income for any differences between U.S. GAAP and Japanese GAAP.

The fair value of the Company’s ownership interest in the common stock of Yahoo Japan, based on the quoted stock price, was approximately $8 billion as of June 30, 2010.

During the three months ended June 30, 2009 and 2010, the Company received cash dividends from Yahoo Japan in the amounts of $26 million and $61 million, net of taxes, respectively, which were recorded as reductions to the Company’s investment in Yahoo Japan.

The following tables present summarized financial information derived from Yahoo Japan’s consolidated financial statements, which are prepared on the basis of Japanese GAAP. The Company has made adjustments to the Yahoo Japan financial information to address differences between Japanese GAAP and U.S. GAAP that materially impact the summarized financial information below. Due to these adjustments, the Yahoo Japan summarized financial information presented below is not materially different than such information presented on the basis of U.S. GAAP.

	Three Months Ended				Six Months Ended
	March 31, 2009		March 31, 2010		March 31, 2009		March 31, 2010
	(in thousands)
Operating data:
Revenue	$	803,611	$	896,822	$	1,582,258	$	1,790,717
Gross profit	$	681,792	$	720,102	$	1,339,770	$	1,454,038
Income from operations	$	380,281	$	426,552	$	724,586	$	832,212
Net income	$	200,770	$	258,877	$	401,286	$	492,805
Net income attributable to Yahoo Japan	$	199,840	$	257,379	$	398,549	$	489,625
					September 30, 2009		March 31, 2010
					(in thousands)
Balance sheet data:
Current assets					$	1,599,624	$	2,193,611
Long-term assets					$	2,395,863	$	2,318,512
Current liabilities					$	997,722	$	1,138,856
Long-term liabilities					$	3,556	$	4,520
Noncontrolling interests					$	26,662	$	24,456

Through its commercial arrangement with Yahoo Japan, the Company provides advertising and search marketing services to Yahoo Japan for a service fee. Under this arrangement, the Company records marketing services revenue from Yahoo Japan for the provision of search marketing services based on a percentage of advertising revenue earned by Yahoo Japan for the delivery of sponsored search results. In addition, the Company recognizes revenue from license fees received from Yahoo Japan. These arrangements resulted in revenue of approximately $73 million and $76 million for the three months ended June 30, 2009 and 2010, respectively, and revenue of approximately $148 million and $150 million, respectively, for the six months ended June 30, 2009 and 2010. As of both December 31, 2009 and June 30, 2010, the Company had a net receivable balance from Yahoo Japan of approximately $41 million.

Note 5 GOODWILL

The Company’s goodwill balance was $3.6 billion as of December 31, 2009, of which $2.6 billion was recorded in the Americas segment, $0.6 billion in the EMEA segment, and $0.4 billion in the Asia Pacific segment. The change in the carrying amount of goodwill for the six months ended June 30, 2010 was primarily due to the addition of $75 million related to acquisitions in the Americas segment, foreign currency translation losses of $55 million, and a reduction of $19 million related to the allocation of goodwill for the February 2010 sale of Zimbra, Inc., an acquisition made by the Company in October 2007. As of June 30, 2010, the Company’s goodwill balance was $3.6 billion, of which $2.7 billion was recorded in the Americas segment, $0.5 billion in the EMEA segment, and $0.4 billion in the Asia Pacific segment.

10

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Note 6 INTANGIBLE ASSETS, NET

The following table summarizes the Company’s intangible assets, net (in thousands):

	December 31, 2009		June 30, 2010
	Net		Gross Carrying Amount		Accumulated Amortization(*)			Net
Customer and advertiser related relationships	$	83,232	$	134,984	$	(66,470	)	$	68,514
Developed technology and patents		239,285		400,352		(209,062	)		191,290
Trade names, trademarks, and domain names		33,366		76,628		(48,150	)		28,478
Total intangible assets, net	$	355,883	$	611,964	$	(323,682	)	$	288,282

^(*) Foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities, totaled approximately $13 million as of June 30, 2010.

For the three months ended June 30, 2009 and 2010, the Company recognized amortization expense for intangible assets of $59 million and $32 million, respectively, including $50 million in cost of revenue for the three months ended June 30, 2009 and $25 million in cost of revenue for the three months ended June 30, 2010. For the six months ended June 30, 2009 and 2010, the Company recognized amortization expense for intangible assets of $106 million and $68 million, respectively, including $87 million in cost of revenue for the six months ended June 30, 2009 and $52 million in cost of revenue for the six months ended June 30, 2010. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the remainder of 2010 and each of the succeeding years is as follows: six months ending December 31, 2010: $57 million; 2011: $95 million; 2012: $68 million; 2013: $31 million; 2014: $16 million; 2015: $4 million; and cumulatively thereafter: $2 million.

Note 7 OTHER INCOME, NET

Other income, net is comprised of (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2009		June 30, 2010		June 30, 2009			June 30, 2010
Interest and investment income	$	4,640	$	5,837	$	11,488		$	12,180
Gain on sale of marketable equity securities		66,684		—		66,684			—
Gain on sale of Zimbra, Inc		—		—		—			66,130
Other		686		6,751		(1,202	)		20,606
Total other income, net	$	72,010	$	12,588	$	76,970		$	98,916

Interest and investment income consists of income earned from cash in bank accounts and investments made in marketable debt securities and money market funds.

Gain on sale of marketable equity securities includes gains from sales of investments in publicly traded companies. In May 2009, the Company sold all of its Gmarket shares for net proceeds of $120 million. The Company recorded a pre-tax gain of $67 million.

In February 2010, the Company sold Zimbra, Inc., an acquisition the Company made in October 2007, for net proceeds of $100 million. The Company recorded a pre-tax gain of $66 million.

Other consists of foreign exchange gains and losses due to re-measurement of monetary assets and liabilities denominated in non-functional currencies, gains/losses from sales of marketable debt securities and/or investments in privately held companies, and other non-operating items.

Note 8 COMPREHENSIVE INCOME

Comprehensive income, net of taxes, is comprised of (in thousands):

	Three Months Ended						Six Months Ended
	June 30, 2009			June 30, 2010			June 30, 2009			June 30, 2010
Net income	$	143,040		$	216,143		$	261,735		$	528,422
Change in net unrealized (losses) gains, net on available-for-sale securities, net of tax and reclassification adjustments		(7,073	)		4,702			(7,401	)		5,748
Foreign currency translation adjustments		15,653			(111,471	)		97,769			(170,701	)
Other comprehensive income		8,580			(106,769	)		90,368			(164,953	)
Comprehensive income		151,620			109,374			352,103			363,469
Comprehensive income attributable to noncontrolling interests		(1,653	)		(2,822	)		(2,790	)		(4,910	)
Comprehensive income attributable to Yahoo! Inc.	$	149,967		$	106,552		$	349,313		$	358,559

11

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

The following table summarizes the components of accumulated other comprehensive income (in thousands):

	December 31, 2009		June 30, 2010
Unrealized gains on available-for-sale securities, net of tax	$	4,921	$	10,669
Foreign currency translation, net of tax		364,315		193,614
Accumulated other comprehensive income	$	369,236	$	204,283

Note 9 INVESTMENTS

The following tables summarize the investments in available-for-sale securities (in thousands):

	December 31, 2009
	Gross Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government and agency securities	$	1,781,674	$	868	$	(1,825	)	$	1,780,717
Municipal bonds		465,823		739		(3	)		466,559
Corporate debt securities, commercial paper, and bank certificates of deposit		995,291		1,305		(1,298	)		995,298
Corporate equity securities		2,597		—		—			2,597
Total investments in available-for-sale securities	$	3,245,385	$	2,912	$	(3,126	)	$	3,245,171

	June 30, 2010
	Gross Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government and agency securities	$	1,515,717	$	2,293	$	(188	)	$	1,517,822
Municipal bonds		215,092		153		(10	)		215,235
Corporate debt securities, commercial paper, and bank certificates of deposit		882,980		1,422		(1,856	)		882,546
Corporate equity securities		2,597		—		(1,507	)		1,090
Total investments in available-for-sale securities	$	2,616,386	$	3,868	$	(3,561	)	$	2,616,693
					December 31, 2009			June 30, 2010
Reported as:
Short-term marketable debt securities					$	2,015,655		$	1,576,276
Long-term marketable debt securities						1,226,919			1,039,327
Other assets						2,597			1,090
Total					$	3,245,171		$	2,616,693

Available-for-sale securities included in cash and cash equivalents on the condensed consolidated balance sheets are not included in the table above as the gross unrealized gains and losses were immaterial for both 2009 and the six months ended June 30, 2010 as the carrying value approximates fair value because of the short maturity of those instruments.

The contractual maturities of available-for-sale marketable debt securities were as follows (in thousands):

	December 31, 2009		June 30, 2010
Due within one year	$	2,015,655	$	1,576,276
Due after one year through five years		1,226,919		1,039,327
Total available-for-sale marketable debt securities	$	3,242,574	$	2,615,603

12

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

The following tables show all investments in an unrealized loss position for which an other-than-temporary impairment has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

	December 31, 2009
	Less than 12 Months					12 Months or Greater				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Government and agency securities	$	886,657	$	(1,825	)	$	—	$	—	$	886,657	$	(1,825	)
Municipal bonds		8,760		(3	)		—		—		8,760		(3	)
Corporate debt securities and commercial paper		352,031		(1,298	)		—		—		352,031		(1,298	)
Total investments in available-for-sale securities	$	1,247,448	$	(3,126	)	$	—	$	—	$	1,247,448	$	(3,126	)

	June 30, 2010
	Less than 12 Months					12 Months or Greater				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Government and agency securities	$	241,284	$	(188	)	$	—	$	—	$	241,284	$	(188	)
Municipal bonds		20,358		(10	)		—		—		20,358		(10	)
Corporate debt securities and commercial paper		306,814		(1,856	)		—		—		306,814		(1,856	)
Corporate equity securities		1,090		(1,507	)		—		—		1,090		(1,507	)
Total investments in available-for-sale securities	$	569,546	$	(3,561	)	$	—	$	—	$	569,546	$	(3,561	)

The Company’s investment portfolio consists of liquid high-quality fixed income government, agency, municipal, and corporate debt securities, money market funds, and time deposits with financial institutions. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Fixed income securities may have their fair market value adversely impacted due to a deterioration of the credit quality of the issuer. The longer the term of the securities, the more susceptible they are to changes in market rates. Investments are reviewed periodically to identify possible other-than-temporary impairment. The Company has no current requirement or intent to sell these securities. The Company expects to recover up to (or beyond) the initial cost of investment for securities held.

The FASB’s authoritative guidance on fair value measurements establishes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Basis of Fair Value Measurement

Level 1	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2	Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3	Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

13

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of December 31, 2009 (in thousands):

	Fair Value Measurements at Reporting Date Using
Assets	Level 1		Level 2		Total
Money market funds(1)	$	364,602	$	—	$	364,602
Available-for-sale securities:
Government and agency securities(1)		—		1,938,608		1,938,608
Municipal bonds(1)		—		470,031		470,031
Commercial paper and bank certificates of deposit(1)		—		445,786		445,786
Corporate debt securities(1)		—		641,104		641,104
Available-for-sale securities at fair value	$	364,602	$	3,495,529	$	3,860,131
Corporate equity securities(2)		2,597		—		2,597
Total assets at fair value	$	367,199	$	3,495,529	$	3,862,728

⁽¹⁾ The money market funds, Government and agency securities, municipal bonds, commercial paper and bank certificates of deposit, and corporate debt securities are classified as part of either cash and cash equivalents or investments in marketable debt securities in the condensed consolidated balance sheets.

⁽²⁾ The corporate equity securities are classified as part of other long-term assets in the condensed consolidated balance sheets.

The amount of cash and cash equivalents as of December 31, 2009 includes $658 million in cash deposited with commercial banks, of which $205 million are time deposits.

The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of June 30, 2010 (in thousands):

	Fair Value Measurements at Reporting Date Using
Assets	Level 1		Level 2		Total
Money market funds(1)	$	293,090	$	—	$	293,090
Available-for-sale securities:
Government and agency securities(1)		—		1,550,914		1,550,914
Municipal bonds(1)		—		215,235		215,235
Commercial paper and bank certificates of deposit(1)		—		267,718		267,718
Corporate debt securities(1)		—		692,268		692,268
Available-for-sale securities at fair value	$	293,090	$	2,726,135	$	3,019,225
Corporate equity securities(2)		1,090		—		1,090
Total assets at fair value	$	294,180	$	2,726,135	$	3,020,315

⁽¹⁾ The money market funds, Government and agency securities, municipal bonds, commercial paper and bank certificates of deposit, and corporate debt securities are classified as part of either cash and cash equivalents or investments in marketable debt securities in the condensed consolidated balance sheets.

⁽²⁾ The corporate equity securities are classified as part of other long-term assets in the condensed consolidated balance sheets.

The amount of cash and cash equivalents as of June 30, 2010 includes $780 million in cash deposited with commercial banks, of which $298 million are time deposits.

The fair values of the Company’s Level 1 financial assets are based on quoted market prices of the identical underlying security. The fair values of the Company’s Level 2 financial assets are obtained from readily-available pricing sources for the identical underlying security that may not be actively traded. The Company utilizes a pricing service to assist in obtaining fair value pricing for the majority of this investment portfolio. The Company conducts reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure. During the six months ended June 30, 2010, the Company did not make significant transfers between Level 1 and Level 2 assets. As of December 31, 2009 and June 30, 2010, the Company did not have any significant Level 3 financial assets.

Note 10 STOCKHOLDERS’ EQUITY AND EMPLOYEE BENEFITS

Employee Stock Purchase Plan. As of June 30, 2010, there was $5 million of unamortized stock-based compensation cost related to the Company’s employee stock purchase plan which is expected to be recognized over a weighted average period of 0.4 years.

14

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Stock Options. The Company’s 1995 Stock Plan, the Directors’ Plan, and other stock-based award plans assumed through acquisitions are collectively referred to as the “Plans.” Stock option activity under the Company’s Plans for the six months ended June 30, 2010 is summarized as follows (in thousands, except per share amounts):

	Shares		Weighted Average Exercise Price per Share
Outstanding at December 31, 2009	119,593		$	25.74
Options granted	6,914		$	15.28
Options exercised(*)	(2,724	)	$	10.45
Options expired	(11,013	)	$	45.29
Options cancelled/forfeited	(5,289	)	$	18.65
Outstanding at June 30, 2010	107,481		$	23.80

^(*) The Company issued new shares to satisfy stock option exercises.

As of June 30, 2010, there was $155 million of unrecognized stock-based compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 2.1 years.

The Company determines the grant-date fair value of stock options, including the options granted under the Company’s employee stock purchase plan, using a Black-Scholes model, unless the options are subject to market conditions, in which case the Company uses a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. The following weighted average assumptions were used in determining the fair value of option grants using the Black-Scholes option pricing model:

	Stock Options				Purchase Plan
	Three Months Ended				Three Months Ended
	June 30, 2009		June 30, 2010		June 30, 2009		June 30, 2010
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Risk-free interest rate	2.0	%	2.2	%	3.3	%	2.3	%
Expected volatility	48.4	%	36.7	%	52.5	%	68.1	%
Expected life (in years)	4.00		4.50		1.50		0.36

	Stock Options				Purchase Plan
	Six Months Ended				Six Months Ended
	June 30, 2009		June 30, 2010		June 30, 2009		June 30, 2010
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Risk-free interest rate	1.8	%	2.2	%	2.9	%	2.3	%
Expected volatility	52.8	%	34.0	%	62.1	%	68.9	%
Expected life (in years)	4.00		4.50		1.32		0.44

Restricted stock awards and restricted stock units activity for the six months ended June 30, 2010 is summarized as follows (in thousands, except per share amounts):

	Shares		Weighted Average Grant Date Fair Value
Awarded and unvested at December 31, 2009(*)	26,189		$	21.14
Granted(*)	14,481		$	15.59
Vested	(6,765	)	$	22.21
Forfeited	(3,095	)	$	17.67
Awarded and unvested at June 30, 2010(*)	30,810		$	18.64

^(*) Includes the maximum number of shares issuable under the Company’s performance-based executive incentive restricted stock unit awards.

As of June 30, 2010, there was $268 million of unrecognized stock-based compensation cost related to unvested restricted stock awards and restricted stock units which is expected to be recognized over a weighted average period of 2.5 years.

During the six months ended June 30, 2010, 6.8 million shares subject to previously granted restricted stock awards and restricted stock units vested. A majority of these vested restricted stock awards and restricted stock units were net share settled. The Company withheld 2.5 million shares based upon the Company’s closing stock price on the vesting date to settle the employees’ minimum statutory obligation for the applicable income and other employment taxes. The Company then remitted cash to the appropriate taxing authorities.

15

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Total payments for the employees’ tax obligations to the relevant taxing authorities were $41 million for the six months ended June 30, 2010 and are reflected as a financing activity within the condensed consolidated statements of cash flows. The payments were used for tax withholdings related to the net share settlements of restricted stock units and tax withholding-related reacquisition of shares of restricted stock. The payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.

During the six months ended June 30, 2009, 5.8 million shares subject to previously granted restricted stock awards and restricted stock units vested. A majority of these vested restricted stock awards and restricted stock units were net share settled. The Company withheld 2 million shares based upon the Company’s closing stock price on the vesting date to settle the employees’ minimum statutory obligation for the applicable income and other employment taxes. The Company then remitted cash to the appropriate taxing authorities.

Total payments for the employees’ tax obligations to the relevant taxing authorities were $27 million for the six months ended June 30, 2009 and are reflected as a financing activity within the condensed consolidated statements of cash flows. Upon the vesting of shares of certain restricted stock awards, 0.2 million shares were reacquired by the Company to satisfy the related tax withholding obligations and $2 million was recorded as treasury stock. Payments of $25 million related to the net share settlement of 2 million restricted stock units had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.

Performance-Based Executive Incentive Restricted Stock Units. In February 2009, the Compensation Committee approved long-term performance-based incentive equity awards to Ms. Bartz and other senior officers, including two types of restricted stock units that vest based on the Company’s achievement of certain performance goals. For both types of restricted stock units, the number of shares which ultimately vest will range from 0 percent to 200 percent of the target amount stated in each executive’s award agreement based on the performance of the Company relative to the applicable performance target. The first type of restricted stock unit generally will vest on the third anniversary of the grant date based on the Company’s attainment of certain annual financial performance targets as well as the executive’s continued employment through that vesting date. The annual financial performance targets are established at the beginning of each fiscal year and, accordingly, the tranche of the award subject to each annual target is treated as a separate annual grant for accounting purposes. The fair value of each of the 2009 tranche and the 2010 tranche of the February 2009 annual financial performance restricted stock unit grant was $3 million. Based on the Company’s relative attainment of the 2009 performance target, 75 percent of the target amount of the 2009 tranche shares will vest, provided each executive remains employed through the third anniversary of the grant date. For accounting purposes, the 2009 and 2010 tranches are being recognized as stock-based compensation expense over a three- and two-year service period, respectively. The second type of restricted stock unit generally will vest following the third anniversary of the grant date based on the Company’s attainment of certain levels of total stockholder return relative to the returns for the NASDAQ 100 Index companies as well as the executive’s continued employment through that vesting date. The fair value of these restricted stock units is $13 million and is being recognized as stock-based compensation expense over a three-year service period.

Separately in February 2010, the Compensation Committee approved additional long-term performance-based incentive equity awards to Ms. Bartz and other senior officers, including two types of restricted stock units that vest based on the Company’s achievement of certain performance goals. For both types of restricted stock units, the number of shares which ultimately vest will range from 0 percent to 200 percent of the target amount stated in each executive’s award agreement based on the performance of the Company relative to the applicable performance target. The first type of restricted stock unit generally will vest on the third anniversary of the grant date based on the Company’s attainment of certain annual financial performance targets as well as the executive’s continued employment through that vesting date. The annual financial performance targets are established at the beginning of each fiscal year and, accordingly, the portion of the award subject to each annual target is treated as a separate annual grant for accounting purposes. The amount of stock-based compensation recorded for the first type of restricted stock unit will vary depending on the Company’s attainment of annual financial performance targets and the completion of the service period. The fair value of the 2010 tranche of the February 2010 annual financial performance restricted stock unit grant is $4 million and is being recognized as stock-based compensation expense over a three-year service period. The second type of restricted stock unit generally will vest following the third anniversary of the grant date based on the Company’s attainment of certain levels of total stockholder return relative to the returns for the NASDAQ 100 Index companies as well as the executive’s continued employment through that vesting date. The fair value of these restricted stock units is $15 million and is being recognized as stock-based compensation expense over a three-year service period.

Stock Repurchases. During the six months ended June 30, 2010, the Company repurchased approximately 56.7 million shares of its common stock under the stock repurchase program announced in October 2006 at an average price of $15.55 per share for a total of $881 million. On June 24, 2010, the Company’s Board of Directors approved a new stock repurchase program. Under the new program, which expires in June 2013, the Company is authorized to repurchase up to $3 billion of its outstanding shares of common stock from time to time. The repurchases may take place in the open market or in privately negotiated transactions, including derivative transactions, and may be made under a Rule 10b5-1 plan. No purchases were made under the new program during the six months ended June 30, 2010. See Note 16 - “Subsequent Events” for share repurchase activity subsequent to June 30, 2010.

16

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Note 11 COMMITMENTS AND CONTINGENCIES

Lease Commitments. The Company leases office space and data centers under operating lease and capital lease agreements with original lease periods of up to 13 years, expiring between 2010 and 2019.

During the second quarter of 2010, the Company acquired certain office space for a total of $72 million ($7 million in cash and the assumption of $65 million in debt). In the first quarter of 2010, the property was reclassified from an operating lease to a capital lease as a result of a commitment to purchase the property. Accordingly, in the second quarter the Company reduced the capital lease obligation for the $7 million cash outlay and reclassified the remaining $65 million as assumed debt in its condensed consolidated balance sheets.

A summary of gross and net lease commitments as of June 30, 2010 is as follows (in millions):

	Gross Operating Lease Commitments		Sublease Income			Net Operating Lease Commitments
Six months ending December 31, 2010	$	80	$	(3	)	$	77
Years ending December 31,
2011		153		(7	)		146
2012		125		(5	)		120
2013		106		(4	)		102
2014		85		(4	)		81
2015		69		(2	)		67
Due after 5 years		70		—			70
Total gross and net lease commitments	$	688	$	(25	)	$	663
						Capital Lease Commitment
Six months ending December 31, 2010						$	4
Years ending December 31,
2011							7
2012							7
2013							8
2014							8
2015							8
Due after 5 years							30
Gross lease commitment						$	72
Less: interest							(31	)
Net lease commitment						$	41

Affiliate Commitments. In connection with contracts to provide advertising services to Affiliates, the Company is obligated to make payments, which represent TAC, to its Affiliates. As of June 30, 2010, these commitments totaled $166 million, of which $67 million will be payable in the remainder of 2010, $90 million will be payable in 2011, $6 million will be payable in 2012, and $3 million will be payable in 2013.

Intellectual Property Rights. The Company is committed to make certain payments under various intellectual property arrangements of up to $39 million through 2023.

Other Commitments. In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, joint ventures and business partners, purchasers of assets or subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of agreements or representations and warranties made by the Company, services to be provided by the Company, intellectual property infringement claims made by third parties or, with respect to the sale of assets or a subsidiary, matters related to the Company’s conduct of the business and tax matters prior to the sale. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The Company has also agreed to indemnify certain former officers, directors, and employees of acquired companies in connection with the acquisition of such companies. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers, and former directors and officers of acquired companies, in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements might not be subject to maximum loss clauses. Historically, the Company has not incurred material costs as a result of obligations under these agreements and it has not accrued any liabilities related to such indemnification obligations in its condensed consolidated financial statements.

17

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Contingencies. From time to time, third parties assert patent infringement claims against Yahoo!. Currently, the Company is engaged in lawsuits regarding patent issues and has been notified of other potential patent disputes. In addition, from time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, trade secrets, and other intellectual property rights, claims related to employment matters, and a variety of other claims, including claims alleging defamation, invasion of privacy, or similar claims arising in connection with the Company’s e-mail, message boards, photo and video sites, auction sites, shopping services, and other communications and community features.

On July 12, 2001, the first of several purported securities class action lawsuits was filed in the U.S. District Court for the Southern District of New York against certain underwriters involved in Overture Services Inc.’s (“Overture”) IPO, Overture, and certain of Overture’s former officers and directors. The Court consolidated the cases against Overture. Plaintiffs allege, among other things, violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “Exchange Act”) involving undisclosed compensation to the underwriters, and improper practices by the underwriters, and seek unspecified damages. Similar complaints were filed in the same court against numerous public companies that conducted IPOs of their common stock since the mid-1990s. All of these lawsuits were consolidated for pretrial purposes before Judge Shira Scheindlin. On April 1, 2009, the parties filed a motion with the Court for preliminary approval of a stipulated global settlement. On October 5, 2009, the Court granted class certification and granted final approval of the settlement and plan of allocation. Notices of appeal have been filed with the U.S. Court of Appeals for the Second Circuit.

On June 14, 2007, a stockholder derivative action was filed in the U.S. District Court for the Central District of California by Jill Watkins against members of the Board and selected officers. The complaint filed by the plaintiff alleged breaches of fiduciary duties and corporate waste, similar to the allegations in the former Brodsky/Hacker class action litigation relating to stock price declines during the period April 2004 to July 2006, and alleged violation of Section 10(b) of the Exchange Act. On July 16, 2009, the plaintiff Watkins voluntarily dismissed the action against all defendants without prejudice. On July 17, 2009, plaintiff Miguel Leyte-Vidal, who had previously substituted in as plaintiff prior to the dismissal of the federal Watkins action, re-filed a shareholder derivative action in Santa Clara County Superior Court against members of the Board and selected officers. The Santa Clara County Superior Court derivative action purports to assert causes of action on behalf of the Company for violation of specified provisions of the California Corporations Code, for breaches of fiduciary duty regarding financial accounting and insider selling and for unjust enrichment. The Court sustained Yahoo!’s demurrer, which challenged the sufficiency of the claim. Plaintiff filed an amended complaint on June 21, 2010. The Yahoo! defendants refiled demurrers to the amended complaint on July 23, 2010.

Plaintiff Congregation Beth Aaron voluntarily dismissed an action filed in Santa Clara County Superior Court and on December 3, 2008 re-filed in the U.S. District Court for the Northern District of California alleging claims for breach of fiduciary duty and corporate waste in connection with Yahoo!’s consideration of proposals by Microsoft Corporation to purchase all or a part of Yahoo! in 2008, adoption of severance plans, and the June 12, 2008 agreement between Google Inc. and Yahoo!. Plaintiff filed an amended complaint on February 20, 2009. The complaint also alleges claims under Section 14(a) of the Exchange Act for alleged false statements or omissions in Yahoo!’s June 9, 2008 proxy statement regarding the severance plans and for control person liability under Section 20(a) of the Exchange Act, and also alleges that the defendants’ decision to settle similar Microsoft-related Delaware lawsuits constituted an independent breach of fiduciary duty. The complaint seeks unspecified compensatory damages, injunctive relief, and an award of plaintiffs’ attorneys’ fees and costs. On June 15, 2009, the Court granted defendants’ motion to dismiss all of Congregation Beth Aaron’s claims without leave to amend, which the Congregation has since appealed to the U.S. Court of Appeals for the Ninth Circuit.

While the outcome of the unsettled matters is currently not determinable, the Company does not believe, based on current knowledge, that any of the foregoing legal proceedings or claims is likely to have a material adverse effect on its financial position, results of operations, or cash flows. In the event of a determination adverse to Yahoo!, its subsidiaries, directors, or officers, in these matters, however, the Company may incur substantial monetary liability, and be required to change its business practices. Either of these could have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company may also incur substantial expenses in defending against these claims.

Note 12 SEGMENTS

The Company manages its business geographically. Through the first quarter of 2010, the primary areas of measurement and decision-making were the U.S. and International. Beginning in the second quarter of 2010, the business management structure of the Company was redefined along three geographies: Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific. Prior period presentations have been updated to conform to the segments currently being used by management to evaluate the operational performance of the Company.

In the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, the segment profitability measure reported by the Company was segment operating income before depreciation, amortization, and stock-based compensation expense. Management no longer uses this measure to evaluate the operational performance of the Company’s segments. Beginning in the first quarter of 2010, management relies on an internal reporting process that provides revenue and direct costs by segment and consolidated income from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, the Company’s segments. Prior period presentations have been updated to conform to the current profitability measures being used by management to evaluate the financial performance of the Company’s segments.

18

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

The following tables present summarized information by segment (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2009		June 30, 2010		June 30, 2009		June 30, 2010
Revenue by segment:
Americas	$	1,186,086	$	1,133,216	$	2,401,694	$	2,288,228
EMEA		150,244		140,513		296,971		282,338
Asia Pacific		236,567		327,650		454,274		627,773
Total revenue		1,572,897		1,601,379		3,152,939		3,198,339
Direct costs by segment(1):
Americas		441,318		427,405		891,350		854,056
EMEA		87,808		80,429		169,174		164,621
Asia Pacific		122,927		176,765		233,754		342,596
Global operating costs(2)		469,823		515,789		993,861		1,017,613
Restructuring charges, net		65,002		10,052		69,803		14,464
Depreciation and amortization		197,740		157,970		379,313		323,216
Stock-based compensation expense		112,526		57,597		239,246		118,380
Income from operations	$	75,753	$	175,372	$	176,438	$	363,393
(1)       Direct costs for each segment include TAC, other cost of revenue, and 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. (2)       Global operating costs include product development, service engineering and operations, marketing, customer advocacy, general and administrative, and other corporate expenses that are managed on a global basis and that are not directly attributable to any segment.
		Three Months Ended				Six Months Ended
		June 30, 2009		June 30, 2010		June 30, 2009		June 30, 2010
Capital expenditures, net:
Americas	$	83,037	$	147,551	$	140,875	$	239,350
EMEA		3,870		23,560		11,399		35,131
Asia Pacific		7,767		19,159		12,881		28,330
Total capital expenditures, net	$	94,674	$	190,270	$	165,155	$	302,811

	December 31, 2009		June 30, 2010
Property and equipment, net:
Americas	$	1,314,712	$	1,389,294
EMEA		40,311		56,075
Asia Pacific		71,839		72,522
Total property and equipment, net	$	1,426,862	$	1,517,891

The following table presents revenue for groups of similar services (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2009		June 30, 2010		June 30, 2009		June 30, 2010
Marketing services:
Owned and Operated sites	$	858,160	$	881,051	$	1,730,063	$	1,755,871
Affiliate sites		519,690		557,421		1,030,968		1,105,119
Marketing services		1,377,850		1,438,472		2,761,031		2,860,990
Fees		195,047		162,907		391,908		337,349
Total revenue	$	1,572,897	$	1,601,379	$	3,152,939	$	3,198,339

19

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Note 13 INCOME TAXES

The effective tax rates for the three and six months ended June 30, 2010 were 36 percent and 26 percent, respectively, compared to 47 percent and 41 percent for the same periods in 2009. The effective tax rates for the three and six months ended June 30, 2010 differ from the statutory federal income tax rate of 35 percent due to the reduction of the Company’s reserves for tax uncertainties and the usage of loss carryforwards to offset the tax on the gain from sale of Zimbra, Inc. In addition to those recognized benefits, the effective tax rate differs from the statutory rate as a result of several factors, including state taxes, the effect of non-U.S. operations, and non-deductible stock-based compensation expense. The effective tax rates for the three and six months ended June 30, 2010 differed from the rates for the same periods in 2009 as a result of the same factors.

During the quarter ended June 30, 2010, the U.S. Internal Revenue Service (“IRS”) completed its field examination of the Company’s 2005 and 2006 tax returns and issued notices of proposed adjustment. The Company reached an agreement with the IRS in connection with several of the adjustments and adjusted its reserves accordingly. There are other proposed adjustments, including an intercompany transfer pricing matter which could have a significant impact on the Company’s tax liability in future years if not resolved favorably, that the Company has not agreed to and is contesting through the administrative process. The Company believes its existing reserves are adequate.

The Company’s gross amount of unrecognized tax benefits as of June 30, 2010 is $624 million, of which $464 million is recorded on the condensed consolidated balance sheets. In the six months ended June 30, 2010 the Company reached an agreement with the IRS in connection with several adjustments to prior years’ tax returns and this agreement resulted in a reduction to the Company’s gross unrecognized tax benefits of $312 million. Of this $312 million reduction in unrecognized tax benefits, $81 million resulted in an effective tax rate benefit during the six months ended June 30, 2010, $88 million was recorded as a deferred tax asset representing capital loss carryforwards and the remainder represents potential benefits that have been disallowed but which were not previously recorded as benefits nor used to reduce income taxes payable in prior periods. A full valuation allowance was immediately applied in connection with the recorded capital loss carryforwards as a result of the uncertainties related to their future use. The reduction to the gross unrecognized tax benefits has been partially offset by increases from current year tax positions. In total, the gross unrecognized tax benefits as of June 30, 2010 decreased by $270 million from the recorded balance as of December 31, 2009.

The Company is in various stages of the examination and appeals process in connection with all of its tax audits worldwide and it is difficult to determine when these examinations will be settled. In addition, the Company is working to complete a pre-filing agreement with the IRS for its 2009 U.S. Federal income tax return. As a result of all of the above, it is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. It is not possible to determine either the magnitude or range of any increase or decrease at this time.

Note 14 RESTRUCTURING CHARGES, NET

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

	Three Months Ended					Six Months Ended
	June 30, 2009			June 30, 2010		June 30, 2009			June 30, 2010
Employee severance pay and related costs	$	30,389		$	692	$	32,198		$	950
Non-cancelable lease, contract termination, and other charges		42,213			9,360		45,205			13,514
Sub-total before reversal of stock-based compensation expense		72,602			10,052		77,403			14,464
Reversal of stock-based compensation expense for forfeitures		(7,600	)		—		(7,600	)		—
Restructuring charges, net	$	65,002		$	10,052	$	69,803		$	14,464

Although the Company does not allocate restructuring charges to its segments, the amounts of the restructuring charges relating to each segment are presented below.

Q4’08 Restructuring Plan. During the fourth quarter of 2008, the Company implemented certain cost reduction initiatives, including a workforce reduction and consolidation of certain real estate facilities. During the three and six months ended June 30, 2009, the Company incurred total pre-tax cash charges of approximately $42 million and $47 million, respectively, in severance, facility, and other restructuring costs related to the Q4’08 restructuring plan. Net charges under the Q4’08 restructuring plan relating to the Americas segment were $40 million and $46 million for the three and six months ended June 30, 2009, respectively. Net charges under the Q4’08 restructuring plan relating to the EMEA segment were $2 million and $1 million (which is net of a $1 million credit in the first quarter of 2009) for the three and six months ended June 30, 2009, respectively. During the three and six months ended June 30, 2010, the Company incurred total pre-tax cash charges of approximately $10 million and $14 million, respectively, in facility and other restructuring costs related to the Q4’08 restructuring plan. Net charges under the Q4’08 restructuring plan relating to the Americas segment were $9 million and $14 million for the three and six months ended June 30, 2010, respectively. Net charges under the Q4’08 restructuring plan relating to the EMEA segment were $1 million and $0 million (which is net of a $1 million credit in the first quarter of 2010) for the three and six months ended June 30, 2010, respectively.

20

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

Q2’09 Restructuring Plan. During the second quarter of 2009, the Company implemented new cost reduction initiatives to further reduce the Company’s worldwide workforce by approximately 5 percent. During the three and six months ended June 30, 2009, the Company incurred total pre-tax cash charges of approximately $31 million in severance and other related costs related to the Q2’09 restructuring plan. The pre-tax cash charges were offset by an $8 million reduction related to non-cash stock-based compensation expense reversals for unvested stock awards that were forfeited. Of the $23 million restructuring charges, net recorded in the three and six months ended June 30, 2009, $16 million related to the Americas segment, $6 million related to the EMEA segment, and $1 million related to the Asia Pacific segment. During the three and six months ended June 30, 2010, the Company did not incur any charges related to the Q2’09 restructuring plan.

Q4’09 Restructuring Charges. During the fourth quarter of 2009, the Company decided to close one of its EMEA facilities and began implementation of a workforce realignment at the facility to focus resources on its strategic initiatives. The Company plans to exit the facility in the third quarter of 2010. In connection with the strategic realignment efforts, an executive of one of the Company’s acquired businesses departed. During the three and six months ended June 30, 2010, the Company incurred total pre-tax cash charges of less than $1 million in severance and other related costs related to the Q4’09 restructuring charges, consisting of charges related to the EMEA segment.

Restructuring Accruals. As of December 31, 2009 and June 30, 2010, the aggregate outstanding restructuring liability related to the cost reduction initiatives was $79 million and $66 million, respectively. Of the $66 million restructuring liability as of June 30, 2010, $11 million relates to employee severance pay expenses which the Company expects to substantially pay out by the end of the second quarter of 2011, and $55 million relates to non-cancelable lease costs which the Company expects to pay over the terms of the related obligations, which extend to the second quarter of 2017.

The activity in the Company’s restructuring accruals for the six months ended June 30, 2010 is summarized as follows (in thousands):

	Q4’08 Restructuring Plan			Q2’09 Restructuring Plan			Q4’09 Restructuring Charges			Total
Balance as of January 1, 2010	$	59,965		$	4,302		$	14,765		$	79,032
Employee severance pay and related costs		361			225			767			1,353
Non-cancelable lease, contract termination, and other charges		15,636			—			—			15,636
Other non-cash charges		72			—			—			72
Reversal of previous charges		(2,194	)		(403	)		—			(2,597	)
Restructuring charges, net for the six months ended June 30, 2010	$	13,875		$	(178	)	$	767		$	14,464
Cash paid		(18,707	)		(2,299	)		(4,166	)		(25,172	)
Non-cash adjustments		226			(628	)		(1,949	)		(2,351	)
Balance as of June 30, 2010	$	55,359		$	1,197		$	9,417		$	65,973

Restructuring accruals by segment consisted of the following (in thousands):

	December 31, 2009		June 30, 2010
Americas	$	52,860	$	50,303
EMEA		25,869		15,605
Asia Pacific		303		65
Total restructuring accruals	$	79,032	$	65,973

Note 15 SEARCH AGREEMENT WITH MICROSOFT CORPORATION

On December 4, 2009, the Company entered into a Search and Advertising Services and Sales Agreement (“Search Agreement”) with Microsoft Corporation (“Microsoft”) under which Microsoft will be the Company’s exclusive platform technology provider for algorithmic and paid search services and non-exclusive provider for contextual advertising. The Company also entered into a License Agreement with Microsoft. Under the License Agreement, Microsoft acquired an exclusive 10-year license to the Company’s core search technology and will have the ability to integrate this technology into its existing Web search platforms. The Company received regulatory clearance from both the U.S. Department of Justice and the European Commission on February 18, 2010 and commenced implementation of the Search Agreement on February 23, 2010. Under the Search Agreement, the Company will be the exclusive worldwide relationship sales force for both companies’ premium search advertisers, which include advertisers meeting certain spending or other criteria, advertising agencies that specialize in or offer search engine marketing services and their clients, and resellers and their clients seeking assistance with their paid search accounts. The term of the Search Agreement is 10 years from February 23, 2010, subject to earlier termination as provided in the Search Agreement.

21

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements—Continued

(unaudited)

During the first five years of the term of the Search Agreement, the Company will be entitled to receive 88 percent of the net revenue generated from Microsoft’s services on Yahoo! Properties (the “Revenue Share Rate”) and it will also be entitled to receive its share (at the Revenue Share Rate) of the net revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of net revenue is deducted. For new Affiliates during the term of the Search Agreement, and for all Affiliates after the first five years of such term, the Company will receive its share (at the Revenue Share Rate) of the net revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of net revenue and certain Microsoft costs are deducted. On the fifth anniversary of the date of implementation of the Search Agreement, Microsoft will have the option to terminate the Company’s sales exclusivity for premium search advertisers. If Microsoft exercises its option, the Revenue Share Rate will increase to 93 percent for the remainder of the term of the Search Agreement, unless the Company exercises its option to retain the Company’s sales exclusivity, in which case the Revenue Share Rate would be reduced to 83 percent for the remainder of the term. If Microsoft does not exercise such option, the Revenue Share Rate will be 90 percent for the remainder of the term of the Search Agreement.

Microsoft has agreed to reimburse the Company for certain transition costs up to an aggregate total of $150 million during the first three years of the Search Agreement. From February 23, 2010 until the applicable services are fully transitioned to Microsoft, Microsoft will also reimburse the Company for the costs of running its algorithmic and paid search services subject to specified exclusions and limitations. These search operating cost reimbursements and certain employee retention costs are separate from and in addition to the $150 million of transition cost reimbursement payments.

The global transition of the Company’s algorithmic and paid search platforms to Microsoft and migration of its paid search advertisers and publishers is expected to take up to 24 months from the date the Company commenced implementation and will be done on a market by market basis. The Company began reflecting reimbursements from Microsoft for transition costs and the cost of running its algorithmic and paid search services during the quarter ended March 31, 2010. Based on the Company’s current levels of revenue and operating expenses, it expects the Search Agreement, when fully implemented, to have a positive impact on its operating income and to result in capital expenditures savings.

The Company’s results for the three and six months ended June 30, 2010 reflect $86 million and $121 million, respectively, in search operating cost reimbursements from Microsoft under the Search Agreement. Search operating cost reimbursements are expected to continue in each quarter of 2010 at an estimated rate of $75 to $85 million per quarter. Search operating cost reimbursements will continue until the Company has fully transitioned to Microsoft’s search platform. As the Company transitions each market, search operating cost reimbursements will decline and the underlying expenses will be removed from our cost structure.

The Company’s results for the three and six months ended June 30, 2010 also reflect transition cost reimbursements from Microsoft under the Search Agreement, which were equal to the transition costs of $18 million and $42 million, respectively, incurred by Yahoo! related to the Search Agreement in 2010. In addition, in the six months ended June 30, 2010, $43 million was recorded for reimbursement of transition costs incurred in 2009, $15 million for employee retention costs incurred in 2010, and $5 million for employee retention costs incurred in 2009. The 2009 transition cost reimbursements were recorded in 2010 after regulatory clearance in the U.S. and Europe was received, implementation of the Search Agreement commenced, and Microsoft became obligated to make such payments. In the future, quarterly transition cost reimbursements are expected to continue to be roughly equal to quarterly transition costs.

Reimbursement receivables are recorded as the reimbursable costs are incurred and are applied against the operating expense categories in which the costs were incurred. As of June 30, 2010, a total of $226 million of reimbursable expenses had been incurred by the Company related to the Search Agreement. Of that amount, $151 million had been received from Microsoft and $75 million was classified as part of prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets as of June 30, 2010.

Note 16 SUBSEQUENT EVENTS

Stock Repurchase Transactions. Subsequent to June 30, 2010, the Company repurchased approximately 23.2 million shares of its common stock at an average price of $14.02 per share, for a total of $326 million. Of such repurchases, $92 million was under the October 2006 program and $234 million was under the June 2010 program.

22

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 for marketing services and fees;

• expectations about growth in users;

• expectations about cost of revenue and operating expenses;

• expectations about the amount of unrecognized tax benefits and the adequacy of our existing tax reserves;

• 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; 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,” “us,” or “our”), attracts hundreds of millions of users every month through its innovative technology and engaging content and services, making it one of the most trafficked Internet destinations and a world class online media company. Yahoo!’s vision is to be the center of people’s online lives by delivering personally relevant, meaningful Internet experiences. To users, we provide online properties and services (“Yahoo! Properties” or our “Owned and Operated sites”). To advertisers, we provide a range of marketing services designed to reach and connect with users of our Owned and Operated sites, as well as with Internet users beyond Yahoo! Properties, through a distribution network of third-party entities (our “Affiliates”) that have integrated our advertising offerings into their Websites, referred to as Affiliate sites, or their other offerings. We believe that our marketing services enable advertisers to deliver highly relevant marketing messages to their target audiences.

We generate revenue by providing marketing services to advertisers across a majority of Yahoo! Properties and Affiliate sites. Our marketing services offerings include the display of graphical advertisements (“display advertising”), the display of text-based links to an advertiser’s Website (“search advertising”), listing-based services, and commerce-based transactions. Additionally, although many of the services we provide to users are free, we charge fees for a range of premium services.

Our offerings to users on Yahoo! Properties currently fall into four categories: Integrated Consumer Experiences, Applications (Communications and Communities), Search, and Media Products and Solutions. The majority of our offerings are available in more than 25 languages. We manage and measure our business geographically, principally the Americas, EMEA (Europe, Middle East, and Africa) and Asia Pacific.

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.

23

Second Quarter Results

	Three Months Ended June 30,				Dollar Change		Six Months Ended June 30,						Dollar Change
Operating Results	2009		2010				2009			2010
	(In thousands)
Revenue	$	1,572,897	$	1,601,379	$	28,482	$	3,152,939		$	3,198,339		$	45,400
Income from operations	$	75,753	$	175,372	$	99,619	$	176,438		$	363,393		$	186,955
							Six Months Ended June 30,						Dollar Change
Cash Flow Results							2009			2010
							(In thousands)
Net cash provided by operating activities							$	604,143		$	490,564		$	(113,579	)
Net cash (used in) provided by investing activities							$	(744,615	)	$	253,213		$	997,828
Net cash provided by (used in) financing activities							$	111,620		$	(775,242	)	$	(886,862	)

Our revenue increased 2 percent and 1 percent for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. This can be attributed to an increase in our marketing services revenue, offset by a decrease in our fees revenue. The increase in income from operations of $100 million and $187 million for the three and six months ended June 30, 2010, respectively, reflects a slight increase in revenue and a decrease in operating expenses of $41 million and $117 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease in operating expenses is primarily attributable to decreases in stock-based compensation, restructuring charges, and depreciation and amortization expense.

Cash generated by operating activities is a measure of the cash productivity of our business model. Our operating activities in the six months ended June 30, 2010 generated adequate cash to meet our operating needs. Cash provided by investing activities in the six months ended June 30, 2010 included net proceeds from sales and maturities of marketable debt securities of $600 million and proceeds from the sale of a divested business of $100 million, offset by net capital expenditures of $303 million, and $112 million, net used for acquisitions. Cash used in financing activities included $881 million used in the direct repurchase of common stock and $41 million used for tax withholding payments related to the net share settlements of restricted stock units and tax withholding-related reacquisition of shares of restricted stock, offset by $84 million in proceeds from employee option exercises and employee stock purchases.

Search Agreement with Microsoft Corporation

Our results for the three and six months ended June 30, 2010 reflect $86 million and $121 million, respectively, in search operating cost reimbursements from Microsoft under our Search and Advertising Services and Sales Agreement (“Search Agreement”). Search operating cost reimbursements are expected to continue in each quarter of 2010 at an estimated rate of $75 to $85 million per quarter. Search operating cost reimbursements will continue until we have fully transitioned to Microsoft’s search platform. The global transition of the algorithmic and paid search platforms to Microsoft and migration of paid search advertisers and publishers is expected to take up to 24 months from February 23, 2010, the date we began implementing the Search Agreement, and will be done on a market by market basis. As we transition each market, search operating cost reimbursements will decline and the underlying expenses will be removed from our cost structure.

Our results for the three and six months ended June 30, 2010 also reflect transition cost reimbursements from Microsoft under the Search Agreement, which were equal to the transition costs of $18 million and $42 million, respectively, incurred by Yahoo! related to the Search Agreement in 2010. In addition, in the six months ended June 30, 2010, we recorded $43 million for reimbursement of transition costs incurred in 2009, $15 million for employee retention costs incurred in 2010, and $5 million for employee retention costs incurred in 2009. The 2009 transition cost reimbursements were recorded in 2010 after regulatory clearance in the U.S. and Europe was received, implementation of the Search Agreement commenced, and Microsoft became obligated to make such payments. In the future, quarterly transition cost reimbursements are expected to continue to be roughly equal to quarterly transition costs.

We record receivables for the reimbursements as costs are incurred and apply them against the operating expense categories in which the costs were incurred. As of June 30, 2010, we had incurred a total of $226 million of reimbursable expenses related to the Search Agreement. Of that amount, $151 million had been received from Microsoft, and $75 million was classified as part of prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets as of June 30, 2010.

We expect migration of our paid search advertisers and publishers to Microsoft’s platforms to start in late 2010 or early 2011 after sufficient testing and training has been conducted to enable our advertisers and publishers to transition with quality and without adverse impact to advertisers’ holiday season. We expect search revenue sharing to begin at that time. Based on our current levels of revenue and operating expenses, we expect the Search Agreement, when fully implemented, to have a positive impact on our operating income and to result in capital expenditures savings.

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

Results of Operations

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

	Three Months Ended June 30,								Percent Change		Six Months Ended June 30,								Percent Change
	2009		(*)		2010		(*)				2009		(*)		2010		(*)
Marketing services:
Owned and Operated sites	$	858,160	55	%	$	881,051	55	%	3	%	$	1,730,063	55	%	$	1,755,871	55	%	1	%
Affiliate sites		519,690	33	%		557,421	35	%	7	%		1,030,968	33	%		1,105,119	34	%	7	%
Marketing services		1,377,850	88	%		1,438,472	90	%	4	%		2,761,031	88	%		2,860,990	89	%	4	%
Fees		195,047	12	%		162,907	10	%	(16	)%		391,908	12	%		337,349	11	%	(14	)%
Total revenue	$	1,572,897	100	%	$	1,601,379	100	%	2	%	$	3,152,939	100	%	$	3,198,339	100	%	1	%

^(*) Percent of total revenue.

We generate marketing services revenue principally from display advertising on Owned and Operated sites and from search advertising. We also receive revenue 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 revenue 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 revenue to increase for the three months ending September 30, 2010 compared to the three months ended September 30, 2009 provided advertising spending increases.

Marketing Services Revenue from Owned and Operated Sites. Marketing services revenue from Owned and Operated sites for the three and six months ended June 30, 2010 increased by 3 percent and 1 percent, respectively, as compared to the same periods in 2009. The primary components of our marketing services revenue from Owned and Operated sites are search and display advertising. For both the three and six months ended June 30, 2010, revenue from display advertising on Owned and Operated sites increased 19 percent, compared to the same periods in 2009. For the three and six months ended June 30, 2010, revenue from search advertising on Owned and Operated sites decreased 8 percent and 11 percent, respectively, compared to the same periods in 2009. Increased advertising spending in display and a shift towards higher-yielding display inventory have resulted in increased display revenue. Search advertising revenue decreased primarily due to the impact of discontinuing our paid inclusion search product as part of our advertising quality initiatives and declines in revenue per search. While overall search queries on Yahoo! Properties increased, the higher international volume growth had lower revenue per search. This created a shift in the mix of monetizable searches which yielded lower overall Owned and Operated revenue per search.

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 six months ended June 30, 2010, Page Views decreased 4 percent and 2 percent, respectively, and revenue per Page View increased 7 percent and 4 percent, respectively, compared to the same period in 2009.

Marketing Services Revenue from Affiliate Sites. Marketing services revenue from Affiliate sites for both the three and six months ended June 30, 2010 increased 7 percent, compared to the same periods in 2009. The number of searches on Affiliate sites increased by approximately 1 percent and 2 percent, respectively, for the three and six months ended June 30, 2010, as compared to the same periods in 2009. The increase in revenue can be attributed primarily to the impact of foreign exchange rate fluctuations in the Asia Pacific segment, increased traffic on Affiliate sites, and a new Affiliate in the Asia Pacific segment added in the fourth quarter of 2009. The average revenue per search on our Affiliate sites increased by 9 percent and 6 percent for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009.

Fees Revenue. Our fees revenue includes premium fee-based services such as services for small businesses, Internet broadband services, premium e-mail, sports, photos, games, personals, and music. Other fee-based revenue includes royalties, licenses, and mobile services. Fees revenue for the three and six months ended June 30, 2010 decreased by 16 percent and 14 percent, respectively, compared to the same periods in 2009. The decrease in fees revenue is primarily attributed to changes in certain of our broadband access partnerships, from being fee-paying user based to other fee structures such as advertising revenue sharing or fixed fee. In addition, revenue from other premium services has declined year-over-year as we continue to outsource various offerings.

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

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

	Three Months Ended June 30,								Percent Change		Dollar Change
	2009		(*)		2010		(*)
Cost of revenue	$	712,453	45	%	$	682,722	43	%	(4	)%	$	(29,731	)
Sales and marketing	$	280,386	18	%	$	331,468	21	%	18	%	$	51,082
Product development	$	291,398	19	%	$	268,552	17	%	(8	)%	$	(22,846	)
General and administrative	$	138,652	9	%	$	125,333	8	%	(10	)%	$	(13,319	)
Amortization of intangibles	$	9,253	1	%	$	7,880	0	%	(15	)%	$	(1,373	)
Restructuring charges, net	$	65,002	4	%	$	10,052	1	%	(85	)%	$	(54,950	)
	Six Months Ended June 30,								Percent Change		Dollar Change
	2009		(*)		2010		(*)
Cost of revenue	$	1,413,190	45	%	$	1,389,104	43	%	(2	)%	$	(24,086	)
Sales and marketing	$	601,498	19	%	$	645,006	20	%	7	%	$	43,508
Product development	$	597,441	19	%	$	534,629	17	%	(11	)%	$	(62,812	)
General and administrative	$	275,649	9	%	$	235,761	7	%	(14	)%	$	(39,888	)
Amortization of intangibles	$	18,920	1	%	$	15,982	0	%	(16	)%	$	(2,938	)
Restructuring charges, net	$	69,803	2	%	$	14,464	0	%	(79	)%	$	(55,339	)

^(*) Percent of total revenue.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2009			2010		2009			2010
Cost of revenue	$	2,663		$	580	$	6,242		$	1,591
Sales and marketing		35,651			21,540		85,548			35,218
Product development		51,647			26,132		105,925			58,505
General and administrative		22,565			9,345		41,531			23,066
Restructuring expense reversals, net		(7,600	)		—		(7,600	)		—
Total stock-based compensation expense	$	104,926		$	57,597	$	231,646		$	118,380

For additional information about stock-based compensation, see Note 10 — “Stockholders’ Equity and Employee Benefits” 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, 2009 under the caption Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Traffic Acquisition Costs. TAC consists 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 revenue 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 revenue, number of paid introductions, number of searches, or other metrics are expensed based on the volume of the underlying activity or revenue 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 June 30, 2010 compared to the three months ended June 30, 2009 are comprised of the following (in thousands):

	Compensation			Information Technology			Depreciation and Amortization			Facilities			TAC		Other			Total
Cost of revenue	$	(8,844	)	$	(21,487	)	$	(35,906	)	$	2,099		$	36,699	$	(2,292	)	$	(29,731	)
Sales and marketing		15,619			(590	)		(548	)		(2,085	)		—		38,686			51,082
Product development		(24,937	)		5,043			(645	)		(4,033	)		—		1,726			(22,846	)
General and administrative		(13,329	)		(295	)		(1,296	)		(349	)		—		1,950			(13,319	)
Amortization of intangibles		—			—			(1,373	)		—			—		—			(1,373	)
Restructuring charges, net		—			—			—			—			—		(54,950	)		(54,950	)
Total	$	(31,491	)	$	(17,329	)	$	(39,768	)	$	(4,368	)	$	36,699	$	(14,880	)	$	(71,137	)

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The changes in operating costs and expenses for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 are comprised of the following (in thousands):

	Compensation			Information Technology			Depreciation and Amortization			Facilities			TAC		Other			Total
Cost of revenue	$	(15,859	)	$	(40,286	)	$	(54,796	)	$	2,023		$	79,434	$	5,398		$	(24,086	)
Sales and marketing		(2,632	)		(1,012	)		140			(6,375	)		—		53,387			43,508
Product development		(67,679	)		12,521			2,317			(8,997	)		—		(974	)		(62,812	)
General and administrative		(17,607	)		(148	)		(820	)		4,810			—		(26,123	)		(39,888	)
Amortization of intangibles		—			—			(2,938	)		—			—		—			(2,938	)
Restructuring charges, net		—			—			—			—			—		(55,339	)		(55,339	)
Total	$	(103,777	)	$	(28,925	)	$	(56,097	)	$	(8,539	)	$	79,434	$	(23,651	)	$	(141,555	)

Compensation Expense. Total compensation expense decreased $31 million and $104 million for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009. The declines were primarily due to a decrease in stock-based compensation expense. The decrease in stock-based compensation expense is due to recent grants having a lower grant date fair value than grants currently vesting, offset by increased salaries and wages from increased headcount, primarily in the product development and sales and marketing functions as well as merit increases for employees. In addition, for the three and six months ended June 30, 2010 we recorded reimbursements from Microsoft of $47 million and $122 million, respectively, for employee costs, for which there were no similar reimbursements in the same periods of 2009. For the three and six months ended June 30, 2010, the net impact of the Search Agreement with Microsoft was a reduction in compensation expense of $32 million and $70 million, respectively, compared to the same periods of 2009.

Information Technology. Information technology expense decreased $17 million and $29 million for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009. The declines for the three and six months ended June 30, 2010 were primarily due to reimbursements recorded from Microsoft of $26 million and $41 million, respectively, for information technology costs, for which there were no similar reimbursements in the same periods of 2009 slightly offset by hardware costs supporting our headcount growth. For the three and six months ended June 30, 2010, the net impact of the Search Agreement was a reduction in information technology expenses of $26 million and $41 million, respectively, compared to the same periods of 2009.

Depreciation and Amortization. Depreciation and amortization expense decreased $40 million and $56 million for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009. The decreases were due to decreased amortization expense for fully amortized intangible assets acquired in prior years. In addition, for the three and six months ended June 30, 2010 we recorded reimbursements from Microsoft of $7 million and $10 million, respectively, for depreciation and amortization costs, for which there were no similar reimbursements in the same periods of 2009. For the three and six months ended June 30, 2010, the net impact of the Search Agreement was a reduction in depreciation and amortization expense of $7 million and $10 million, respectively, compared to the same periods of 2009.

TAC. TAC increased $37 million and $79 million for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009. The increases were primarily driven by the impact of foreign exchange rate fluctuations, changes in Affiliate partner mix, a new Affiliate in the Asia Pacific segment added in the fourth quarter of 2009, and increases in revenue from Affiliate sites.

Facilities and Other Expenses. Facilities and other expenses decreased $19 million for the three months ended June 30, 2010, compared to the same period in 2009 mainly due to a decrease in restructuring charges of $55 million, offset by increased marketing expenses of $30 million. Facilities and other expenses decreased $32 million for the six months ended June 30, 2010, compared to the same period in 2009 mainly due to decreased third-party service provider expenses of $30 million and a decrease in restructuring charges of $55 million, offset by increased marketing expenses of $55 million and increased travel and entertainment expenses of $12 million.

Marketing-related expenses increased due to additional marketing advertising campaigns including our global branding campaign during the three and six months ended June 30, 2010, compared to the same periods in 2009. Third-party service-provider expenses decreased primarily due to lower advisory and consulting costs. In addition, for the three and six months ended June 30, 2010, we recorded total cost reimbursements from Microsoft of $24 million and $53 million, respectively, for other costs, for which there were no similar reimbursements in the same periods of 2009. For the three and six months ended June 30, 2010, the net impact of the Search Agreement was a reduction in facilities and other expenses of $21 million and $43 million, respectively, compared to the same periods of 2009.

We currently expect our operating costs to decrease for the three months ending September 30, 2010, compared to the same period of 2009, due to declines in stock-based compensation expense and depreciation and amortization expense.

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

	Three Months Ended					Six Months Ended
	June 30, 2009			June 30, 2010		June 30, 2009			June 30, 2010
Employee severance pay and related costs	$	30,389		$	692	$	32,198		$	950
Non-cancelable lease, contract termination, and other charges		42,213			9,360		45,205			13,514
Sub-total before reversal of stock-based compensation expense		72,602			10,052		77,403			14,464
Reversal of stock-based compensation expense for forfeitures		(7,600	)		—		(7,600	)		—
Restructuring charges, net	$	65,002		$	10,052	$	69,803		$	14,464

Although we do not allocate restructuring charges to our segments, the amounts of the restructuring charges relating to each segment are presented below.

Q4’08 Restructuring Plan. During the fourth quarter of 2008, we implemented certain cost reduction initiatives, including a workforce reduction and consolidation of certain real estate facilities. During the three and six months ended June 30, 2009, we incurred total pre-tax cash charges of approximately $42 million and $47 million, respectively, in severance, facility, and other restructuring costs related to the Q4’08 restructuring plan. Net charges under the Q4’08 restructuring plan relating to the Americas segment were $40 million and $46 million for the three and six months ended June 30, 2009, respectively. Net charges under the Q4’08 restructuring plan relating to the EMEA segment were $2 million and $1 million (which is net of a $1 million credit in the first quarter of 2009) for the three and six months ended June 30, 2009, respectively. During the three and six months ended June 30, 2010, we incurred total pre-tax cash charges of approximately $10 million and $14 million, respectively, in facility and other restructuring costs related to the Q4’08 restructuring plan. Net charges under the Q4’08 restructuring plan relating to the Americas segment were $9 million and $14 million for the three and six months ended June 30, 2010, respectively. Net charges under the Q4’08 restructuring plan relating to the EMEA segment were $1 million and $0 million (which is net of a $1 million credit in the first quarter of 2010) for the three and six months ended June 30, 2010, respectively. As of June 30, 2010, the aggregate outstanding restructuring liability related to the Q4’08 restructuring plan was $55 million, most of which relates to non-cancelable lease costs that we expect to pay over the lease terms of the related obligations, which end by the second quarter of 2017.

Q2’09 Restructuring Plan. During the second quarter of 2009, we implemented new cost reduction initiatives to further reduce our worldwide workforce by approximately 5 percent. During the three and six months ended June 30, 2009, we incurred total pre-tax cash charges of approximately $31 million in severance and other related costs related to the Q2’09 restructuring plan. The pre-tax cash charges were offset by an $8 million reduction related to non-cash stock-based compensation expense reversals for unvested stock awards that were forfeited. Of the $23 million restructuring charges, net recorded in the three and six months ended June 30, 2009, $16 million related to the Americas segment, $6 million related to the EMEA segment, and $1 million related to the Asia Pacific segment. During the three and six months ended June 30, 2010, we did not incur any charges related to the Q2’09 restructuring plan. As of June 30, 2010, the aggregate outstanding restructuring liability related to the Q2’09 restructuring plan was $1 million, which we expect to pay out by the second quarter of 2011.

Q4’09 Restructuring Charges. During the fourth quarter of 2009, we decided to close one of our EMEA facilities and began implementation of a workforce realignment at the facility to focus resources on our strategic initiatives. We plan to exit the facility in the third quarter of 2010. In connection with the strategic realignment efforts, an executive of one of our acquired businesses departed. During the three and six months ended June 30, 2010, we incurred total pre-tax cash charges of less than $1 million in severance and other related costs related to the Q4’09 restructuring charges, consisting of charges mainly related to the EMEA segment. As of June 30, 2010, the aggregate outstanding restructuring liability related to the Q4’09 restructuring charges was $10 million, which we expect to pay out by the second quarter of 2011.

In addition to the charges described above, we currently expect to incur future charges of approximately $24 million to $32 million for non-cancelable lease costs and relocation costs as we continue to exit facilities identified as part of the Q4’08 restructuring plan and Q4’09 restructuring charges, of which $18 million to $24 million relates to the Americas segment, $6 million to $8 million relates to the EMEA segment, and no charge relates to the Asia Pacific segment. The future charges are expected to be recorded primarily in 2010 and 2011.

Our restructuring charges for excess lease facilities are highly dependent upon estimated amounts of sublease income. Time required to market and obtain a subtenant or to terminate lease obligations varies considerably with commercial real estate market conditions in certain geographies. Our restructuring charges represent the best estimate of the fair value of the obligations we expect to incur and could be subject to adjustment as market conditions change and sublease agreements are signed through fiscal 2017. Refer to Note 14 — “Restructuring charges, net” in the Notes to the condensed consolidated financial statements for additional information.

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

	Three Months Ended June 30,				Dollar Change			Six Months Ended June 30,					Dollar Change
	2009		2010					2009			2010
Interest and investment income	$	4,640	$	5,837	$	1,197		$	11,488		$	12,180	$	692
Gain on sale of marketable equity securities		66,684		—		(66,684	)		66,684			—		(66,684	)
Gain on sale of Zimbra, Inc.		—		—		—			—			66,130		66,130
Other		686		6,751		6,065			(1,202	)		20,606		21,808
Total other income, net	$	72,010	$	12,588	$	(59,422	)	$	76,970		$	98,916	$	21,946

In February 2010, we sold Zimbra, Inc., an acquisition we made in October 2007, for net proceeds of $100 million and a pre-tax gain of $66 million. During the three months ended June 30, 2009, we tendered all of our Gmarket shares for net proceeds of $120 million. We recorded a pre-tax gain of $67 million. Other consists of foreign exchange gains and losses due to re-measurement of monetary assets and liabilities denominated in non-functional currencies and other non-operating items.

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

Income Taxes. The effective tax rates for the three and six months ended June 30, 2010 were 36 percent and 26 percent, respectively, compared to 47 percent and 41 percent for the same periods in 2009. The effective tax rate for the three and six months ended June 30, 2010 differs from the statutory federal income tax rate of 35 percent due to the reduction of our reserves for tax uncertainties and the usage of loss carryforwards to offset the tax on the gain from the sale of Zimbra, Inc. In addition to those recognized benefits, the effective tax rate differs from the statutory rate as a result of several factors, including state taxes, the effect of non-U.S. operations, and non-deductible stock-based compensation expense. The effective tax rate for the three and six months ended June 30, 2010 was lower than the rate for the same periods in 2009 as a result of the same factors.

Our gross amount of unrecognized tax benefits as of June 30, 2010 is $624 million, of which $464 million is recorded on the condensed consolidated balance sheets. In the six months ended June 30, 2010, we reached an agreement with the U.S. Internal Revenue Service (“IRS”) in connection with several adjustments to prior years’ tax returns, and this agreement resulted in a reduction to our gross unrecognized tax benefits of $312 million. Of this $312 million reduction in unrecognized tax benefits, $81 million resulted in an effective tax rate benefit during the six months ended June 30, 2010, $88 million was recorded as a deferred tax asset representing capital loss carryforwards and the remainder represents potential benefits that have been disallowed but which were not previously used as benefits nor used to reduce income taxes payable in prior periods. A full valuation allowance was immediately applied in connection with the recorded capital loss carryforwards as a result of the uncertainties related to their future use. The reduction to the gross unrecognized tax benefits has been partially offset by increases from current year tax positions. In total, the gross unrecognized tax benefits as of June 30, 2010 decreased by $270 million from the recorded balance as of December 31, 2009.

During the quarter ended June 30, 2010, the IRS completed its field examination of our 2005 and 2006 tax returns and issued notices of proposed adjustment. We reached agreement with the IRS in connection with several of the adjustments and adjusted our reserves accordingly. There are other proposed adjustments, including an intercompany transfer pricing matter which could have a significant impact on our tax liability in future years if not resolved favorably, that we have not agreed to and are contesting through the administrative process. We believe our existing reserves are adequate.

Earnings in Equity Interests. Earnings in equity interests for the three and six months ended June 30, 2010 was $97 million and $184 million, respectively, as compared to $64 million and $113 million for the same periods in 2009 due primarily to Yahoo Japan’s improved financial performance.

Noncontrolling Interests. Noncontrolling interests represent 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 the results of which are consolidated in our condensed consolidated financial statements.

Business Segment Results

We manage our business geographically. Through the first quarter of 2010, the primary areas of measurement and decision-making were the U.S. and International. Beginning in the second quarter of 2010, the business management structure of the Company was redefined along three geographies: Americas, EMEA (Europe, Middle East, and Africa) and Asia Pacific. Prior period presentations have been updated to conform to the segments currently being used by management to evaluate our operational performance.

In our Annual Report on Form 10-K for the year ended December 31, 2009, the segment profitability measure we reported was segment operating income before depreciation, amortization, and stock-based compensation expense. Our management team no longer uses this measure to evaluate the operational performance of our segments. Beginning in the first quarter of 2010, management relies on an internal reporting process that provides revenue and direct costs 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. Prior period presentations have been updated to conform to the current profitability measures being used by management to evaluate the financial performance of our segments.

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

	Three Months Ended						Six Months Ended
	June  30, 2009		June  30, 2010		Percent Change		June  30, 2009		June  30, 2010		Percent Change
Revenue by segment:
Americas	$	1,186,086	$	1,133,216	(4	%)	$	2,401,694	$	2,288,228	(5	%)
EMEA		150,244		140,513	(6	%)		296,971		282,338	(5	%)
Asia Pacific		236,567		327,650	3	9%		454,274		627,773	3	8%
Total revenue		1,572,897		1,601,379		2%		3,152,939		3,198,339		1%
Direct costs by segment(1):
Americas		441,318		427,405	(3	%)		891,350		854,056	(4	%)
EMEA		87,808		80,429	(8	%)		169,174		164,621	(3	%)
Asia Pacific		122,927		176,765	4	4%		233,754		342,596	4	7%
Global operating costs(2) (3)		469,823		515,789	1	0%		993,861		1,017,613		2%
Restructuring charges, net		65,002		10,052	(85	%)		69,803		14,464	(79	%)
Depreciation and amortization		197,740		157,970	(20	%)		379,313		323,216	(15	%)
Stock-based compensation expense		112,526		57,597	(49	%)		239,246		118,380	(51	%)
Income from operations	$	75,753	$	175,372	13	2%	$	176,438	$	363,393	10	6%

⁽¹⁾ Direct costs for each segment include TAC, other cost of revenue, and 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.

⁽²⁾ Global operating costs include product development, service engineering and operations, marketing, customer advocacy, general and administrative, and other corporate expenses that are managed on a global basis and that are not directly attributable to any segment.

⁽³⁾ The net cost reimbursements from Microsoft are primarily included in global operating costs for the three and six months ended June 30, 2010.

Revenue is generally attributed to individual countries according to the sales force that generated the revenue. No single foreign country accounted for more than 10 percent of revenue for the three and six months ended June 30, 2010 or 2009.

Americas. Americas revenue for the three and six months ended June 30, 2010 decreased $53 million, or 4 percent, and $113 million, or 5 percent, respectively, as compared to the same periods in 2009. Our year-over-year decrease in revenue was a result of a decline in our search advertising business and our fee-based services, offset by an increase in our display advertising business. Search advertising revenue decreased primarily due to the impact of discontinuing our paid inclusion search product in late 2009 as part of our advertising quality initiatives, and changes in our Affiliate partner mix. These decreases were offset by an increase in display revenue driven by increased advertising spending and a shift towards higher-yielding display inventory by our customers. For the three and six months ended June 30, 2010 direct costs attributable to the Americas segment, decreased $14 million, or 3 percent, and $37 million, or 4 percent, respectively, compared to the same periods in 2009. The declines are primarily due to a decrease in TAC from the decline in Affiliate search revenue in the Americas.

Revenue in the Americas accounted for approximately 71 percent and 72 percent of total revenue in the three and six months ended June 30, 2010, respectively, compared to 75 percent and 76 percent for the three and six months ended June 30, 2009, respectively.

EMEA. EMEA revenue for the three and six months ended June 30, 2010 decreased $10 million, or 6 percent, and $15 million, or 5 percent, respectively, as compared to the same periods in 2009. The decreases in EMEA revenue were primarily driven by a slight decline in our search advertising business as well as a decline in fees revenue. Search advertising revenue decreased primarily due to traffic quality initiatives. The decrease in fees revenue is primarily attributed to changes in certain broadband access partnerships. For the three and six months ended June 30, 2010 direct costs attributable to the EMEA segment decreased $7 million, or 8 percent, and $5 million, or 3 percent, respectively, compared to the same periods in 2009. The decreases in direct costs were primarily driven by a decrease in TAC associated with the decrease in Affiliate revenue.

Revenue in EMEA accounted for approximately 9 percent of total revenue for both the three and six months ended June 30, 2010, respectively, compared to 10 percent and 9 percent for the three and six months ended June 30, 2009, respectively.

Asia Pacific. Asia Pacific revenue for the three and six months ended June 30, 2010 increased $91 million, or 39 percent, and $173 million, or 38 percent, respectively, as compared to the same periods in 2009. The increases in Asia Pacific revenue were primarily driven by a new Affiliate in the Asia Pacific segment added in the fourth quarter of 2009 and the favorable effects of foreign

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currency exchange rate fluctuations. For the three and six months ended June 30, 2010 direct costs attributable to the Asia Pacific segment increased $54 million, or 44 percent, and $109 million, or 47 percent, respectively, compared to the same periods in 2009. The increases in direct costs were primarily driven by an increase in TAC associated with the increase in Affiliate revenue. For the three and six months ended June 30, 2010, direct costs attributable to the Asia Pacific segment increased by a greater percentage than Asia Pacific revenue in the same periods of 2009 due to an increase in TAC rates.

Revenue in Asia Pacific accounted for approximately 20 percent of total revenue for both the three and six months ended June 30, 2010, respectively, compared to 15 percent and 14 percent for the three and six months ended June 30, 2009, respectively.

Our international operations expose us to foreign currency exchange rate fluctuations. Revenue and related expenses generated from our international subsidiaries are generally denominated in the currencies of the local countries. Primary currencies include Australian dollars, British pounds, Euros, Korean won, and Taiwan dollars. The statements of income of our international operations are translated into U.S. dollars at exchange rates indicative of market rates during each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenue, operating expenses, and net income. Similarly, our consolidated revenue, operating expenses, and net income will increase if the U.S. dollar weakens against foreign currencies. Using the foreign currency exchange rates from the three and six months ended June 30, 2009, revenue for the Americas segment for the three and six months ended June 30, 2010 would have been lower than we reported by $5 million and $9 million, respectively, revenue for the EMEA segment would have been higher than we reported by $3 million and lower than we reported by $7 million, respectively, and revenue for the Asia Pacific segment would have been lower than we reported by $30 million and $66 million, respectively. Using the foreign currency exchange rates from the three and six months ended June 30, 2009, direct costs for the Americas segment for the three and six months ended June 30, 2010 would have been lower than we reported by $2 million and $4 million, respectively, direct costs for the EMEA segment would have been higher than we reported by $2 million and lower than we reported by $4 million, respectively, and direct costs for the Asia Pacific segment would have been lower than we reported by $20 million and $46 million, respectively.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our estimates form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the condensed consolidated financial statements. We believe that our critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the condensed consolidated financial statements.

For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the year ended December 31, 2009 under the caption Management’s Discussion and Analysis of Financial Condition and Results of Operations. We have made no significant changes to our critical accounting policies and estimates since December 31, 2009. Refer to Note 1 — “The Company and Summary of Significant Accounting Policies” in the Notes to the condensed consolidated financial statements for a summary of the new revenue recognition guidance we recently adopted.

Liquidity and Capital Resources

	As of December 31, 2009			As of June 30, 2010
	(Dollars in thousands)
Cash and cash equivalents	$	1,275,430		$	1,183,325
Short-term marketable debt securities		2,015,655			1,576,276
Long-term marketable debt securities		1,226,919			1,039,327
Total cash, cash equivalents, and marketable debt securities	$	4,518,004		$	3,798,928
Percentage of total assets		30	%		26	%

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	Six Months Ended June 30,
Cash Flow Highlights	2009			2010
	(In thousands)
Net cash provided by operating activities	$	604,143		$	490,564
Net cash (used in) provided by investing activities	$	(744,615	)	$	253,213
Net cash provided by (used in) financing activities	$	111,620		$	(775,242	)

Our operating activities for the six months ended June 30, 2010 generated adequate cash to meet our operating needs. As of June 30, 2010, we had cash, cash equivalents, and marketable debt securities totaling $3.8 billion, compared to $4.5 billion at December 31, 2009. During the six months ended June 30, 2010, we repurchased 56.7 million shares for $881 million.

During the six months ended June 30, 2010, we generated $491 million of cash from operating activities, net proceeds from sales and maturities of marketable debt securities of $600 million, $100 million of proceeds from the sale of a divested business, and $84 million from the issuance of common stock as a result of the exercise of employee stock options and employee stock purchases. This was offset by a net $303 million in capital expenditures, a net $112 million for acquisitions, $881 million used in the direct repurchase of common stock, and $41 million in tax withholding payments related to net share settlements of restricted stock units and tax withholding-related reacquisition of shares of restricted stock. During the six months ended June 30, 2009, we generated $604 million of cash from operating activities, $120 million from proceeds from the sales of marketable equity securities, and $71 million from the issuance of common stock as a result of the exercise of employee stock options and employee stock purchases. This was offset by a net $165 million in capital expenditures, $678 million additional investment in securities, and $27 million in tax withholdings related to net share settlements of restricted stock units and tax-related reacquisition of shares of restricted stock.

We expect to continue to generate positive cash flows from operations for the third quarter of 2010. We use cash generated by operations as our primary source of liquidity, since we believe that internally generated cash flows are sufficient to support our business operations and capital expenditures. We believe that existing cash, cash equivalents, and investments in marketable debt securities, together with any cash generated from operations, will be sufficient to meet normal operating requirements including capital expenditures for the next twelve months. However, we may sell additional debt securities or obtain credit facilities to further enhance our liquidity position, and the sale of additional equity securities could result in dilution to our stockholders.

See Note 9 — “Investments” in the Notes to the condensed consolidated financial statements for additional information.

Cash flow changes

Cash provided by operating activities is driven by our net income, adjusted for non-cash items, working capital changes, and non-operating gains from sales of investments. Non-cash adjustments include depreciation, amortization of intangible assets, stock-based compensation expense, non-cash restructuring charges, tax benefits from stock-based awards, excess tax benefits from stock-based awards, deferred income taxes, and earnings in equity interests. Cash provided by operating activities was lower than net income in the six months ended June 30, 2010 due to changes in working capital, including Microsoft reimbursements not yet received as cash. As of June 30, 2010, we had incurred a total of $226 million of reimbursable expenses (including $43 million related to 2009) related to the Search Agreement. Of that amount, $151 million had been received from Microsoft, and $75 million was classified as part of prepaid expenses and other current assets on our condensed consolidated balance sheets.

Cash provided by investing activities was primarily attributable to net proceeds from the sales and maturities of marketable debt securities and proceeds from the sale of a divested business. In the six months ended June 30, 2010, we received net proceeds from sales and maturities of marketable debt securities of $600 million and $100 million from the sale of a business, which was offset by the investment of $303 million in net capital expenditures, $112 million for net acquisitions, and $13 million to purchase intangible assets. During the six months ended June 30, 2009, we invested $165 million in net capital expenditures, $678 million additional investment in securities, and $22 million to purchase intangible assets, which was offset by proceeds of $120 million from the sale of our Gmarket shares.

Cash used in financing activities is driven by stock repurchases offset by employee stock option exercises and employee stock purchases. Our cash proceeds from employee stock option exercises and employee stock purchases were $84 million for the six months ended June 30, 2010, compared to $71 million for the same period of 2009. During the six months ended June 30, 2010, we used $881 million in the direct repurchase of 56.7 million shares of common stock at an average price of $15.55 per share. We used $41 million for tax withholding payments related to net share settlements of restricted stock units and tax withholding-related reacquisition of shares of restricted stock. During the six months ended June 30, 2009, we did not repurchase any shares of common stock. We used $27 million for tax withholding payments related to net share settlements of restricted stock units and tax withholding-related reacquisition of shares of restricted stock.

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Capital expenditures

Capital expenditures have generally comprised purchases of computer hardware, software, server equipment, furniture and fixtures, and real estate. Capital expenditures, net were $303 million for the six months ended June 30, 2010, compared to $165 million in the same period of 2009. Our capital expenditures for the six months ending December 31, 2010 are expected to be higher than the same period of 2009 as we continue to invest in the infrastructure needed to support additional users and improve the performance experienced by our users.

Contractual obligations and commitments

Leases. We have entered into various non-cancelable operating and capital lease agreements for office space and data centers globally for original lease periods up to 13 years, expiring between 2010 and 2019.

During the second quarter of 2010, we acquired certain office space for a total of $72 million ($7 million in cash and the assumption of $65 million in debt). In the first quarter of 2010, the property was re-classified from an operating lease to a capital lease as a result of a commitment to purchase the property. Accordingly, in the second quarter we reduced the capital lease obligation for the $7 million cash outlay and reclassified the remaining $65 million as assumed debt in our condensed consolidated balance sheets.

A summary of lease commitments as of June 30, 2010 is as follows (in millions):

	Gross Operating Lease Commitments		Capital Lease Commitment
Six months ending December 31, 2010	$	80	$	4
Years ending December 31,
2011		153		7
2012		125		7
2013		106		8
2014		85		8
2015		69		8
Due after 5 years		70		30
Total gross lease commitments	$	688	$	72
Less: interest		—		(31	)
Net lease commitments	$	688	$	41

Affiliate Commitments. In connection with contracts to provide advertising services to Affiliates, we are obligated to make payments, which represent traffic acquisition costs, to our Affiliates. As of June 30, 2010, these commitments totaled $166 million, of which $67 million will be payable in the remainder of 2010, $90 million will be payable in 2011, $6 million will be payable in 2012, $3 million will be payable in 2013.

Intellectual Property Rights. We are committed to make certain payments under various intellectual property arrangements of up to $39 million through 2023.

Income Taxes. As of June 30, 2010, the unrecognized tax benefits that resulted in an accrued liability amounted to $464 million and are recorded on our condensed consolidated balance sheets. As of June 30, 2010, the settlement period for our income tax liabilities cannot be determined.

Other Commitments. In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, joint venture and business partners, purchasers of assets or subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us, services to be provided by us, intellectual property infringement claims made by third parties or, with respect to the sale of assets or a subsidiary, matters related to our conduct of the business and tax matters prior to the sale. In addition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We have also agreed to indemnify certain former officers, directors, and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers and former directors and officers of acquired companies, in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements might not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements and we have not accrued any liabilities related to such indemnification obligations in our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the impact of interest rate changes, foreign currency exchange rate fluctuations, and changes in the market values of our investments.

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Interest Rate Risk. Our exposure to market rate risk for changes in interest rates relates primarily to our cash and marketable debt securities portfolio. We invest excess cash in money market funds and liquid marketable debt instruments of the U.S. Government and its agencies, state municipalities, and in high-quality corporate issuers.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. A hypothetical 100 basis point increase in interest rates would result in an approximate $18 million and $25 million decrease in the fair value of our available-for-sale debt securities as of June 30, 2010 and December 31, 2009, respectively.

Foreign Currency Risk. Revenue and related expenses generated from our international subsidiaries are generally denominated in the currencies of the local countries. Primary currencies include Australian dollars, British pounds, Euros, Korean won, and Taiwan dollars. The statements of income of our international operations are translated into U.S. dollars at exchange rates indicative of market rates during each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenue, operating expenses, and net income. Similarly, our revenue, operating expenses, and net income will increase if the U.S. dollar weakens against foreign currencies. Using the foreign currency exchange rates from the three and six months ended June 30, 2009, revenue for the Americas segment for the three and six months ended June 30, 2010 would have been lower than we reported by $5 million and $9 million, respectively, revenue for the EMEA segment would have been higher than we reported by $3 million and lower than we reported by $7 million, respectively, and revenue for the Asia Pacific segment would have been lower than we reported by $30 million and $66 million, respectively. Using the foreign currency exchange rates from the three and six months ended June 30, 2009, direct costs for the Americas segment for the three and six months ended June 30, 2010 would have been lower than we reported by $2 million and $4 million, respectively, direct costs for the EMEA segment would have been higher than we reported by $2 million and lower than we reported by $4 million, respectively, and direct costs for the Asia Pacific segment would have been lower than we reported by $20 million and $46 million, respectively.

As mentioned above, we are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries and our investments in equity interests into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars results in a gain or loss which is recorded as a component of accumulated other comprehensive income which is part of stockholders’ equity. In addition, we have certain assets and liabilities that are denominated in currencies other than the respective entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a gain or loss. We record these foreign currency transaction gains and losses, realized and unrealized, in other income, net on the condensed consolidated statements of income. During the three and six months ended June 30, 2010, we recorded realized and unrealized foreign currency transaction gains of $8 million and $13 million, respectively. During the three and six months ended June 30, 2009, our net realized and unrealized foreign currency transaction losses were not material.

Investment Risk. We are exposed to investment risk as it relates to changes in the market value of our investments. We have investments in marketable debt securities.

Our cash and marketable debt securities investment policy and strategy attempts primarily to preserve capital and meet liquidity requirements. A large portion of our cash is managed by external managers within the guidelines of our investment policy. We protect and preserve invested funds by limiting default, market, and reinvestment risk. To achieve this objective, we maintain our portfolio of cash and cash equivalents and short-term and long-term investments in a variety of liquid fixed income securities, including both government and corporate obligations and money market funds. As of June 30, 2010 and 2009, net unrealized gains and losses on these investments were not material.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our material legal proceedings, see Note 11 — “Commitments and Contingencies” in the Notes to the condensed consolidated financial statements, which is incorporated by reference herein.

Item 1A. Risk Factors

We have updated the risk factors previously disclosed in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission on February 26, 2010, as set forth below. We do not believe any of the changes constitute material changes from the risk factors previously disclosed in the 10-K for the year ended December 31, 2009.

We face significant competition for users, advertisers, publishers and distributors.

We face significant competition from integrated online media companies as well as from social networking sites and traditional print and broadcast media.

Google, Microsoft, and AOL each offer an integrated variety of Internet products, advertising services, technologies, online services and content in a manner similar to Yahoo!. Among other areas, we compete against these companies:

• to attract and retain users;

• to attract and retain advertisers;

• to attract and retain third-party Website publishers as participants in our Affiliate network; and

• to obtain agreements with software publishers, internet access providers, mobile carriers, device manufacturers and others to promote or distribute our services.

Google, Microsoft and others offer products and services that directly compete for users with our offerings, including consumer e-mail, desktop search, local search, instant messaging, photos, maps, video sharing, content channels, mobile applications, and shopping. Similarly, the advertising networks operated by Google, Microsoft, AOL and others offer services that directly compete with our offerings for advertisers, including advertising exchanges, ad serving technologies and sponsored search offerings. While under our Search Agreement with Microsoft, Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers and Microsoft will become Yahoo!’s exclusive platform technology provider for algorithmic and paid search services, Yahoo! and Microsoft will still continue to compete for users, advertisers, publishers and distribution partners as described above.

We further compete for users, advertisers and developers with social media and networking sites such as Facebook.com as well as the wide variety of other providers of online services. Social networking sites in particular are attracting a substantial and increasing share of users and users’ online time, which could enable them to attract an increasing share of online advertising dollars.

We also compete with traditional print and broadcast media companies to attract advertising dollars, both domestically and internationally. Currently many advertisers direct a portion, but only a portion, of their advertising budgets to Internet advertising. In response, traditional media companies are increasingly expanding their content offerings onto the Web and thus are competing not only to keep offline advertising dollars but also for a share of online advertising dollars.

Some of our existing competitors and possible additional entrants may have greater brand recognition for certain products and services, more expertise in a particular segment of the market, and greater operational, strategic, technological, financial, personnel, or other resources than we do. For example, Google and Microsoft have access to considerable financial and technical resources with which to compete aggressively, including by funding future growth and expansion and investing in acquisitions and research and development. In addition, emerging start-ups may be able to innovate and provide new products and services faster than we can.

If our competitors are more successful than we are in developing and deploying compelling products or in attracting and retaining users, advertisers, publishers, developers, or distributors, our revenue and growth rates could decline. In addition, competitors may consolidate with each other or collaborate and new competitors may enter the market.

The majority of our revenue is derived from marketing services, and the reduction in spending by or loss of current or potential advertisers would cause our revenue and operating results to decline.

For the three and six months ended June 30, 2010, 90 percent and 89 percent, respectively, of our total revenue came from marketing services. Our ability to continue to retain and grow marketing services revenue depends upon:

• maintaining and growing our user base;

• maintaining and growing our popularity as an Internet destination site;

• maintaining and expanding our advertiser base;

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• broadening our relationships with advertisers to small- and medium-sized businesses;

• the successful implementation of changes and improvements to our advertising management platforms and acceptance of our advertising management platforms by advertisers, Website publishers, and online advertising networks;

• continuing to innovate and improve users’ search experiences;

• maintaining and expanding our Affiliate program for search and display marketing services; and

• deriving better demographic and other information about our users to enable us to offer better experiences to both our users and advertisers.

In most cases, our agreements with advertisers have a term of one year or less, and may be terminated at any time by the advertiser or by Yahoo!. Search marketing agreements often have payments dependent upon usage or click-through levels. Accordingly, it is difficult to forecast marketing services revenue accurately. In addition, our expense levels are based in part on expectations of future revenue, including occasional guaranteed minimum payments to our Affiliates in connection with search and/or display advertising, and are fixed over the short-term in some categories. The state of the global economy and availability of capital has impacted and could further impact the advertising spending patterns of existing and potential future advertisers. Any reduction in spending by, or loss of, existing or potential future advertisers would cause our revenue to decline. Further, we may be unable to adjust our expenses and capital expenditures quickly enough to compensate for any unexpected revenue shortfall.

Adverse general economic conditions have caused and could cause decreases or delays in marketing services spending by our advertisers and could harm our ability to generate marketing services revenue and our results of operations.

Marketing services expenditures tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Since we derive most of our revenue from marketing services, the adverse economic conditions have caused, and a continuation of adverse economic conditions could cause, additional decreases in or delays in advertising spending, a reduction in our marketing services revenue and a negative impact on our short term ability to grow our revenue. Further, any decreased collectability of accounts receivable or early termination of agreements, whether resulting from customer bankruptcies or otherwise due to the current deterioration in economic conditions, could negatively impact our results of operations.

If we do not manage our operating expenses effectively, our profitability could decline.

We have implemented cost reduction initiatives to better align our operating expenses with our revenue, including reducing our headcount, outsourcing some administrative functions, consolidating space and terminating leases or entering into subleases. We plan to continue to manage costs to better and more efficiently manage our business. However, our operating expenses might also increase, from their reduced levels, as we expand our operations in areas of desired growth, continue to develop and extend the Yahoo! brand, fund product development, and acquire and integrate complementary businesses and technologies. In addition, deteriorating economic conditions or other factors could cause our business to contract requiring us to implement additional cost cutting measures. If our expenses increase at a greater pace than our revenue, or if we fail to implement additional cost cutting if required in a timely manner, our profitability will decline.

Transition and implementation risks associated with our Search Agreement with Microsoft may adversely affect our business and operating results.

Under our Search Agreement with Microsoft, Microsoft will be Yahoo!’s exclusive platform technology provider for algorithmic and paid search services. The parties commenced implementation of the Search Agreement on February 23, 2010. The global transition of Yahoo!’s algorithmic and paid search platforms to Microsoft and migration of Yahoo!’s paid search advertisers and publishers is expected to take up to 24 months and will be done on a market by market basis. The transition process will be complex and will require the expenditure of significant time and resources by us. Delays or difficulties in, or disruptions and inconveniences caused by, the transition process could result in the loss of advertisers, publishers, Affiliates, and employees, as well as delays in recognizing or reductions in the anticipated benefits of the transaction, any of which could negatively impact our business and operating results.

Following the transition in each market, we will be relying on Microsoft as our exclusive platform technology provider of algorithmic and paid search services. If Microsoft fails to perform as required under the Search Agreement for any reason or suffers service level interruptions or other performance issues, we may not realize the anticipated benefits of the Search Agreement, and our search revenue or our profitability could decline.

If we are unable to provide innovative search experiences and other services that generate significant traffic to our Websites, our business could be harmed, causing our revenue to decline.

Internet search is characterized by rapidly changing technology, significant competition, evolving industry standards, and frequent product and service enhancements. We must continually invest in improving our users’ search experience—presenting users with a search experience that is responsive to their needs and preferences—in order to continue to attract, retain, and expand our user base and paid search advertiser base. We currently deploy our own technology to provide search results on our network. Following implementation of our Search Agreement with Microsoft, Microsoft will become our algorithmic and paid search platform technology provider; however, we will continue to need to invest and innovate to improve our users’ search experience.

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We also generate advertising revenue through other online services, such as Yahoo! Mail. If we are unable to provide innovative search and other services which generate significant traffic to our Websites, our business could be harmed, causing our revenue to decline.

We rely on the value of our brands, and a failure to maintain or enhance the Yahoo! brands in a cost-effective manner could harm our operating results.

We believe that maintaining and enhancing our brands is an important aspect of our efforts to attract and expand our user, advertiser, and Affiliate base. We also believe that the importance of brand recognition will increase due to the relatively low barriers to entry in the Internet market. We have spent considerable money and resources to date on the establishment and maintenance of our brands, and we anticipate spending increasing amounts of money on, and devoting greater resources to, advertising, marketing, and other brand-building efforts to preserve and enhance consumer awareness of our brands. Our brands may be negatively impacted by a number of factors, including among other issues: service outages; product malfunctions; data privacy and security issues; exploitation of our trademarks by others without permission; and poor presentation or integration of our search marketing offerings by Affiliates on their sites or in their software and services.

Further, while we attempt to ensure that the quality of our brand is maintained by our licensees, our licensees might take actions that could impair the value of our brand, our proprietary rights, or the reputation of our products and media properties. If we are unable to maintain or enhance customer awareness of, and trust in, our brands in a cost-effective manner, or if we incur excessive expenses in these efforts, our business, operating results and financial condition could be harmed.

Our intellectual property rights are valuable, and any failure or inability to sufficiently protect them could harm our business and our operating results.

We create, own, and maintain a wide array of intellectual property assets, including copyrights, patents, trademarks, trade dress, trade secrets, and rights to certain domain names, which we believe are collectively among our most valuable assets. We seek to protect our intellectual property assets through patent, copyright, trade secret, trademark, and other laws of the U.S. and other countries of the world, and through contractual provisions. However, the efforts we have taken to protect our intellectual property and proprietary rights might not be sufficient or effective at stopping unauthorized use of those rights. Protection of the distinctive elements of Yahoo! might not always be available under copyright law or trademark law, or we might not discover or determine the full extent of any unauthorized use of our copyrights and trademarks in order to protect our rights. In addition, effective trademark, patent, copyright, and trade secret protection might not be available or cost-effective in every country in which our products and media properties are distributed or made available through the Internet. Changes in patent law, such as changes in the law regarding patentable subject matter, could also impact our ability to obtain patent protection for our innovations. Further, given the costs of obtaining patent protection, we might choose not to protect (or not to protect in some jurisdictions) certain innovations that later turn out to be important. There is also a risk that the scope of protection under our patents may not be sufficient in some cases or that existing patents may be deemed invalid or unenforceable. With respect to maintaining our trade secrets, we have entered into confidentiality agreements with most of our employees and contractors, and confidentiality agreements with many of the parties with whom we conduct business in order to limit access to and disclosure of our proprietary information. However, these agreements might be breached and our trade secrets might be compromised by outside parties or by our employees, which could cause us to lose any competitive advantage provided by maintaining our trade secrets.

If we are unable to protect our proprietary rights from unauthorized use, the value of our intellectual property assets may be reduced. In addition, protecting our intellectual property and other proprietary rights is expensive and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and consequently harm our operating results.

We are, and may in the future be, subject to intellectual property infringement or other third-party claims, which are costly to defend, could result in significant damage awards, and could limit our ability to provide certain content or use certain technologies in the future.

Internet, technology, media, and patent holding companies often possess a significant number of patents. Further, many of these companies and other parties are actively developing or purchasing search, indexing, electronic commerce, and other Internet-related technologies, as well as a variety of online business models and methods. We believe that these parties will continue to take steps to protect these technologies, including, but not limited to, seeking patent protection. In addition, patent holding companies may continue to seek to monetize patents they have purchased or otherwise obtained. As a result, disputes regarding the ownership of technologies and rights associated with online businesses are likely to continue to arise in the future. From time to time, parties assert patent infringement claims against us. Currently, we are engaged in a number of lawsuits regarding patent issues and have been notified of a number of other potential disputes.

In addition to patent claims, third parties have asserted, and are likely in the future to assert, claims against us alleging infringement of copyrights, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition, violation of federal or state statutes or other claims, including alleged violation of international statutory and common law. In addition, third parties have made, and may continue to make, trademark infringement and related claims against us over the display of search results triggered by search terms that include trademark terms. Currently, we are engaged in lawsuits regarding such trademark issues.

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As we expand our business and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement claims. In the event that there is a determination that we have infringed third-party proprietary rights such as patents, copyrights, trademark rights, trade secret rights, or other third-party rights such as publicity and privacy rights, we could incur substantial monetary liability, be required to enter into costly royalty or licensing agreements or be prevented from using such rights, which could require us to change our business practices in the future and limit our ability to compete effectively. We may also incur substantial expenses in defending against third-party infringement claims regardless of the merit of such claims. In addition, many of our agreements with our customers or Affiliates require us to indemnify them for some types of third-party intellectual property infringement claims, which could increase our costs in defending such claims and our damages. The occurrence of any of these results could harm our brand and negatively impact our operating results.

We are subject to U.S. and foreign government regulation of Internet, mobile, and voice over internet protocol, or VOIP, products and services which could subject us to claims, judgments, and remedies including monetary liabilities and limitations on our business practices.

We are subject to regulations and laws directly applicable to providers of Internet, mobile, and VOIP services both domestically and internationally. The application of existing domestic and international laws and regulations to Yahoo! relating to issues such as user privacy and data protection, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions, billing, real estate, consumer protection, accessibility, content regulation, quality of services, telecommunications, mobile, television, and intellectual property ownership and infringement in many instances is unclear or unsettled. In addition, we will also be subject to any new laws and regulations directly applicable to our domestic and international activities. Further, the application of existing laws to Yahoo! or our subsidiaries regulating or requiring licenses for certain businesses of our advertisers including, for example, distribution of pharmaceuticals, alcohol, adult content, tobacco, or firearms, as well as insurance and securities brokerage, and legal services, can be unclear. Internationally, we may also be subject to laws regulating our activities in foreign countries and to foreign laws and regulations that are inconsistent from country to country. We may incur substantial liabilities for expenses necessary to defend such litigation or to comply with these laws and regulations, as well as potential substantial penalties for any failure to comply. Compliance with these laws and regulations may also cause us to change or limit our business practices in a manner adverse to our business.

A number of U.S. federal laws, including those referenced below, impact our business. The Digital Millennium Copyright Act (“DMCA”) is intended, in part, to limit the liability of eligible online service providers for listing or linking to third-party Websites that include materials that infringe copyrights or other rights of others. Portions of the Communications Decency Act (“CDA”) are intended to provide statutory protections to online service providers who distribute third-party content. Yahoo! relies on the protections provided by both the DMCA and CDA in conducting its business. Any changes in these laws or judicial interpretations narrowing their protections, or international jurisdictions’ refusal to apply similar provisions to foreign lawsuits, will subject us to greater risk of liability and may increase our costs of compliance with these regulations or limit our ability to operate certain lines of business. The Children’s Online Privacy Protection Act is intended to impose restrictions on the ability of online services to collect some types of information from children under the age of 13. In addition, Providing Resources, Officers, and Technology to Eradicate Cyber Threats to Our Children Act of 2008 (“PROTECT Act”) requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. Other federal and state laws and legislative efforts designed to protect children on the Internet may impose additional requirements on the Company. U.S. export control laws and regulations impose requirements and restrictions on exports to certain nations and persons and on our business. The cost of compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation of them. Further, any failure on our part to comply with these regulations may subject us to significant liabilities.

Changes in regulations or user concerns regarding privacy and protection of user data, or any failure to comply with such laws, could adversely affect our business.

Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we receive from and about our users. We have posted on our and many of our Affiliates’ Websites our own privacy policies and practices concerning the collection, use, and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, Federal Trade Commission requirements or orders, or other federal, state, or international privacy or data-protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business.

Further, failure or perceived failure by us to comply with our policies, applicable requirements, or industry self-regulatory principles related to the collection, use, sharing or security of personal information, or other privacy, data-retention or data-protection matters could result in a loss of user confidence in us, damage to the Yahoo! brands, and ultimately in a loss of users, advertising partners, or Affiliates which could adversely affect our business.

In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection issues which could adversely impact our business. The interpretation and application of privacy, data protection and data retention laws and regulations are currently unsettled in the U.S. and internationally. These laws may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

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We may be subject to legal liability associated with providing online services.

We host a wide variety of services and technology products that enable individuals and businesses to exchange information, upload or otherwise generate photos, videos, text, and other content, advertise products and services, conduct business, and engage in various online activities on a domestic and an international basis. The law relating to the liability of providers of these online services and products for activities of their users is currently unsettled both within the U.S. and internationally. Claims have been threatened and have been brought against us for defamation, negligence, copyright or trademark infringement, unfair competition, unlawful activity, tort, including personal injury, fraud, or other theories based on the nature and content of information to which we provide links or that may be posted online or generated by our users. In addition, Yahoo! has been and may again in the future be subject to domestic or international actions alleging that the availability of certain content within our services violates laws in domestic and international jurisdictions. Defense of any such actions could be costly and involve significant time and attention of our management and other resources and may require us to change our business in an adverse manner.

We arrange for the distribution of third-party advertisements to third-party publishers and advertising networks, and we offer third-party products, services, or content, such as stock quotes and trading information, under the Yahoo! brand or via distribution on Yahoo! Properties. We may be subject to claims concerning these products, services, or content by virtue of our involvement in marketing, branding, broadcasting, or providing access to them, even if we do not ourselves host, operate, provide, or provide access to these products, services, or content. While our agreements with respect to these products, services, and content often provide that we will be indemnified against such liabilities, the ability to receive such indemnification depends on the financial resources of the other party to the agreement and any amounts received might not be adequate to cover our liabilities or the costs associated with defense of such proceedings.

It is also possible that if the manner in which information is provided or any information provided directly by us contains errors or is otherwise wrongfully provided to users, third parties could make claims against us. For example, we offer Web-based e-mail services, which expose us to potential risks, such as liabilities or claims resulting from unsolicited e-mail, lost or misdirected messages, illegal or fraudulent use of e-mail, or interruptions or delays in e-mail service. We may also face purported consumer class actions or state actions relating to our online services, including our fee-based services (particularly in connection with any decision to discontinue a fee-based service). In addition, our customers, third parties or government entities may assert claims or actions against us if our online services or technologies are used to spread or facilitate malicious or harmful code or applications. Investigating and defending these types of claims is expensive, even if the claims are without merit or do not ultimately result in liability, and could subject us to significant monetary liability or cause a change in business practices that could impact our ability to compete.

Acquisitions and strategic investments could result in adverse impacts on our operations and in unanticipated liabilities.

We have acquired, and have made strategic investments in, a number of companies (including through joint ventures) in the past, and we expect to make additional acquisitions and strategic investments in the future. Such transactions may result in dilutive issuances of our equity securities, use of our cash resources, and incurrence of debt and amortization expenses related to intangible assets. Our acquisitions and strategic investments to date were accompanied by a number of risks, including:

• the difficulty of assimilating the operations and personnel of our acquired companies into our operations;

• the potential disruption of our on-going business and distraction of management;

• the incurrence of additional operating losses and expenses of the businesses we acquired or in which we invested;

• the difficulty of integrating acquired technology and rights into our services and unanticipated expenses related to such integration;

• the failure to successfully further develop acquired technology resulting in the impairment of amounts currently capitalized as intangible assets;

• the failure of strategic investments to perform as expected;

• the potential for patent and trademark infringement claims against the acquired company;

• litigation or other claims in connection with the acquired company;

• the impairment of relationships with customers and partners of the companies we acquired or in which we invested or with our customers and partners as a result of the integration of acquired operations;

• the impairment of relationships with employees of the acquired companies or our existing employees as a result of integration of new management personnel;

• our lack of, or limitations on our, control over the operations of our joint venture companies;

• in the case of foreign acquisitions and investments, the difficulty of integrating operations and systems as a result of cultural, systems, and operational differences and the impact of particular economic, currency, political, legal and regulatory risks associated with specific countries; and

• the impact of known potential liabilities or liabilities that may be unknown, including as a result of inadequate internal controls, associated with the companies we acquired or in which we invested.

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We are likely to experience similar risks in connection with our future acquisitions and strategic investments. Our failure to be successful in addressing these risks or other problems encountered in connection with our past or future acquisitions and strategic investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business generally.

Any failure to manage expansion and changes to our business could adversely affect our operating results.

We continue to evolve our business both in the U.S. and internationally. As a result of acquisitions, and international expansion in recent years, more than one-half of our employees are now based outside of our Sunnyvale, California headquarters. If we are unable to effectively manage a large and geographically dispersed group of employees or to anticipate our future growth and personnel needs our business may be adversely affected.

As we expand our business, we must also expand and adapt our operational infrastructure. Our business relies on data systems, billing systems, and financial reporting and control systems, among others. All of these systems have become increasingly complex in the recent past due to the growing complexity of our business, due to acquisitions of new businesses with different systems, and due to increased regulation over controls and procedures. To manage our business in a cost effective manner, we will need to continue to upgrade and improve our data systems, billing systems, and other operational and financial systems, procedures and controls. In some cases, we are outsourcing administrative functions to lower-cost providers. These upgrades, improvements and outsourcing changes will require a dedication of resources and in some cases are likely to be complex. If we are unable to adapt our systems and put adequate controls in place in a timely manner, our business may be adversely affected. In particular, sustained failures of our billing systems to accommodate increasing numbers of transactions, to accurately bill users and advertisers, or to accurately compensate Affiliates could adversely affect the viability of our business model.

Any failure to scale and adapt our existing technology architecture to manage expansion of user-facing services and to respond to rapid technological change could adversely affect our business.

As some of the most visited sites on the Internet, Yahoo! Properties deliver a significant number of products, services, Page Views and advertising impressions to users around the world. The products and services offered by Yahoo! have expanded and changed significantly over time and are expected to continue to expand and change rapidly in the future to accommodate new technologies and Internet advertising solutions, and new means of content delivery.

In addition, the Internet and online services industry is characterized by rapid technological change. Widespread adoption of new Internet, networking or telecommunications technologies, or other technological changes could require substantial expenditures to modify or adapt our services or infrastructure. The technology architectures and platforms utilized for our services are highly complex and may not provide satisfactory support in the future, as usage increases and products and services expand, change, and become more complex. In the future, we may make additional changes to our architectures, platforms and systems, including moving to completely new architectures, platforms and systems. Such changes may be technologically challenging to develop and implement, may take time to test and deploy, may cause us to incur substantial costs or data loss, and may cause delays or interruptions in service. These changes, delays, or interruptions in our service may cause our users, Affiliates and other advertising platform participants to become dissatisfied with our service and move to competing providers or seek remedial actions or compensation.

Further, to the extent that demands for our services increase, we will need to expand our infrastructure, including the capacity of our hardware servers and the sophistication of our software. This expansion is likely to be expensive and complex and require additional technical expertise. As we acquire users who rely upon us for a wide variety of services, it becomes more technologically complex and costly to retrieve, store, and integrate data that will enable us to track each user’s preferences. Any difficulties experienced in adapting our architectures, platforms and infrastructure to accommodate increased traffic, to store user data, and track user preferences, together with the associated costs and potential loss of traffic, could harm our operating results, cash flows from operations, and financial condition.

We have dedicated considerable resources to provide a variety of premium services, which might not prove to be successful in generating significant revenue for us.

We offer fee-based enhancements to many of our free services, including e-mail, personals, finance, games, photographs, and sports. The development cycles for these technologies are long and generally require significant investment by us. We have invested and will continue to invest in new products and services. Some of these new products and services might not generate anticipated revenue or might not meet anticipated user adoption rates. We have previously discontinued some non-profitable premium services and may discontinue others. We must, however, continue to provide new services that are compelling to our users while continuing to develop an effective method for generating revenue for such services. General economic conditions as well as the rapidly evolving competitive landscape may affect users’ willingness to pay for such services. If we cannot generate revenue from these services that are greater than the cost of providing such services, our operating results could be harmed.

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If we are unable to recruit and retain key personnel, we may not be able to execute our business plan.

Our business is dependent on our ability to recruit, hire, motivate, and retain talented, highly skilled personnel. Achieving this objective may be difficult due to many factors, including the intense competition for such highly skilled personnel in the San Francisco Bay Area and other metropolitan areas where our offices and the offices of several of our vertical and horizontal competitors are located, as well as fluctuations in global economic and industry conditions, changes in Yahoo!’s management or leadership, competitors’ hiring practices, and the effectiveness of our compensation programs. If we do not succeed in recruiting, retaining, and motivating our key employees and in attracting new key personnel, we may be unable to meet our business plan and as a result, our revenue and profitability may decline.

If we are unable to license or acquire compelling content and services at reasonable cost or if we do not develop or commission compelling content of our own, the number of users of our services may not grow as anticipated, or may decline, or users’ level of engagement with our services may decline, all or any of which could harm our operating results.

Our future success depends in part on our ability to aggregate compelling content and deliver that content through our online properties. We license from third parties much of the content and services on our online properties, such as news items, stock quotes, weather reports, music video, music radio, and maps. We believe that users will increasingly demand high-quality content and services, including music videos, film clips, news footage, and special productions. Such content and services may require us to make substantial payments to third parties from whom we license or acquire such content or services. Our ability to maintain and build relationships with such third-party providers is critical to our success. In addition, as new methods for accessing the Internet become available, including through alternative devices, we may need to enter into amended agreements with existing third-party providers to cover the new devices. We may be unable to enter into new, or preserve existing, relationships with the third-parties whose content or services we seek to obtain. In addition, as competition for compelling content increases both domestically and internationally, our third-party providers may increase the prices at which they offer their content and services to us, and potential providers may not offer their content or services to us at all, or may offer them on terms that are not agreeable to us. An increase in the prices charged to us by third-party providers could harm our operating results and financial condition. Further, many of our content and services licenses with third parties are non-exclusive. Accordingly, other media providers may be able to offer similar or identical content. This increases the importance of our ability to deliver compelling editorial content and personalization of this content for users in order to differentiate Yahoo! from other businesses. If we are unable to license or acquire compelling content at reasonable prices, if other companies distribute content or services that are similar to or the same as that provided by Yahoo!, or if we do not develop compelling editorial content or personalization services, the number of users of our services may not grow as anticipated, or may decline, which could harm our operating results.

We rely on third-party providers of rich media formats to provide the technologies required to deliver rich media content to our users, and any change in the licensing terms, costs, availability, or user acceptance of these formats and technologies could adversely affect our business.

We rely on leading providers of media formats and media player technology to deliver rich media content and advertising to our users. There can be no assurance that these providers will continue to license their formats and player technologies to us on reasonable terms, or at all. Providers of rich media formats and player technologies may begin charging users or otherwise change their business model in a manner that slows the widespread acceptance of their technologies. In order for our rich media services to be successful, there must be a large base of users of these rich media technologies. We have limited or no control over the availability or acceptance of rich media technologies, and any change in the licensing terms, costs, availability, or user acceptance of these technologies could adversely affect our business.

If we are unable to attract, sustain and renew distribution arrangements on favorable terms, our revenue may decline.

We enter into distribution arrangements with third parties such as operators of third-party Websites, online networks, software companies, electronics companies, computer manufacturers and others to promote or supply our services to their users. For example:

• We maintain search and display advertising relationships with Affiliate sites, which integrate our advertising offerings into their Websites;

• We enter into distribution alliances with Internet service providers (including providers of cable and broadband Internet access) and software distributors to promote our services to their users; and

• We enter into agreements with mobile, tablet, netbook, and other device manufacturers and carriers as well as Internet-enabled television manufacturers and other electronics companies to promote our software and services on their devices.

In some markets, we depend on a limited number of distribution arrangements for a significant percentage of our user activity. A failure by our distributors to attract or retain their user bases would negatively impact our user activity and, in turn, would reduce our revenue.

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Distribution agreements often involve revenue sharing. Over time, competition to enter into distribution arrangements may cause our traffic acquisition costs to increase. In some cases, we guarantee distributors a minimum level of revenue and, as a result, run a risk that the distributors’ performance (in terms of ad impressions, toolbar installations, etc.) might not be sufficient to otherwise earn their minimum payments. In other cases, we agree that if the distributor does not realize specified minimum revenue we will adjust the distributor’s revenue-share percentage or provide make-whole arrangements.

Some of our distribution agreements are not exclusive, have a short term, are terminable at will, or are subject to early termination provisions. The loss of distributors, increased distribution costs, or the renewal of distribution agreements on significantly less favorable terms may cause our revenue to decline.

More individuals are utilizing non-PC devices to access the Internet, and versions of our services developed for these devices might not gain widespread adoption by the devices’ users, manufacturers, or distributors or might fail to function as intended on some devices.

The number of individuals who access the Internet through devices other than a PC, such as mobile telephones, personal digital assistants, hand held computers, tablets, netbooks, televisions, and set-top box devices, has increased dramatically, and the trend is likely to continue. Our services were originally designed for rich, graphical environments such as those available on the desktop and PC. The different hardware and software, memory, operating systems, resolution, and other functionality associated with alternative devices currently available may make our desktop and PC services unusable or difficult to use on such devices. Similarly, the licenses we have negotiated to present third-party content to desktop and PC users may not extend to users of alternative devices. In those cases, we may need to enter into new or amended agreements with the content providers in order to present a similar user-experience on the new devices. The content providers may not be willing to enter into such new or amended agreements on reasonable terms or at all.

We offer versions of many of our popular services (such as sports, finance, and news) designed to be accessed on a number of models of alternative devices. We also offer versions of some of our services (such as instant messaging) designed for specific popular devices. As new devices are introduced, it is difficult to predict the problems we may encounter in developing versions of our services for use on those devices, and we may need to devote significant resources to the creation, support, and maintenance of such versions or risk loss of market share. If we are unable to attract and retain a substantial number of alternative device manufacturers, distributors, content providers, and users to our services, or to capture a sufficient share of an increasingly important portion of the market for these services, we may be unsuccessful in attracting both advertisers and premium service subscribers to these services.

To the extent that an access provider or device manufacturer enters into a distribution arrangement with one of our competitors (or as our competitors design mobile devices and mobile device operating systems), we face an increased risk that our users will favor the services or properties of that competitor. The manufacturer or access provider might promote a competitor’s services or might impair users’ access to our services by blocking access through their devices or by not making our services available in a readily-discoverable manner on their devices. If competitive distributors impair access to our services, or if they simply are more successful than our distributors in developing compelling products that attract and retain users or advertisers, then our revenue could decline.

In the future, as new methods for accessing the Internet and our services become available, including through alternative devices, we may need to enter into amended distribution agreements with existing access providers, distributors and manufacturers to cover the new devices and new arrangements. We face a risk that existing and potential new access providers, distributors, and manufacturers may decide not to offer distribution of our services on reasonable terms, or at all. If we fail to obtain distribution or to obtain distribution on terms that are reasonable, we may not be able to fully execute our business plan.

In international markets, we compete with local Internet service providers that may have competitive advantages.

In a number of international markets, especially those in Asia, Europe, the Middle East and Latin America, we face substantial competition from local Internet service providers and other portals that offer search, communications, and other commercial services. Many of these companies have a dominant market share in their territories and are owned by local telecommunications providers which give them a competitive advantage. Local providers of competing online services may also have a substantial advantage over us in attracting users in their country due to more established branding in that country, greater knowledge with respect to the tastes and preferences of users residing in that country, and/or their focus on a single market. Further, the local providers may have greater regulatory and operational flexibility than Yahoo! due to the fact that we are subject to both U.S. and foreign regulatory requirements. We must continue to improve our local offerings, become more knowledgeable about our local users and their preferences, deepen our relationships with our local users as well as increase our branding and other marketing activities in order to remain competitive and strengthen our international market position.

Our international operations are subject to increased risks which could harm our business, operating results, and financial condition.

In addition to uncertainty about our ability to continue to generate revenue from our foreign operations and expand our international market position, there are risks inherent in doing business internationally, including:

• trade barriers and changes in trade regulations;

• difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences;

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• stringent local labor laws and regulations;

• longer payment cycles;

• credit risk and higher levels of payment fraud;

• profit repatriation restrictions, and foreign currency exchange restrictions;

• political or social unrest, economic instability, repression, or human rights issues;

• geopolitical events, including acts of war and terrorism;

• import or export regulations;

• compliance with U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to government officials;

• seasonal volatility in business activity and local economic conditions;

• laws and business practices that favor local competitors or prohibit foreign ownership of certain businesses;

• different and more stringent user protection, data protection, privacy and other laws; and

• risks related to other government regulation or required compliance with local laws.

Violations of the complex foreign and U.S. laws and regulations that apply to our international operations could result in fines, criminal actions or sanctions against us, our officers or our employees, prohibitions on the conduct of our business and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors or agents will not violate our policies. These risks inherent in our international operations and expansion increase our costs of doing business internationally and could result in harm to our business, operating results, and financial condition.

New technologies could block display advertisements or search marketing advertisements, which could harm our operating results.

Technologies have been developed and are likely to continue to be developed that can block display or search advertisements. Most of our revenue is derived from fees paid by advertisers in connection with the display of graphical advertisements or clicks on search advertisements on Web pages. As a result, advertisement-blocking technology could reduce the number of display and search advertisements that we are able to deliver and, in turn, could reduce our advertising revenue and operating results.

Proprietary document formats may limit the effectiveness of our search technology by preventing our technology from accessing the content of documents in such formats, which could limit the effectiveness of our products and services.

A large amount of information on the Internet is provided in proprietary document formats such as Microsoft Word. These proprietary document formats may limit the effectiveness of search technology by preventing the technology from accessing the content of such documents. The providers of the software applications used to create these documents could engineer the document format to prevent or interfere with the process of indexing the document contents with search technology. This would mean that the document contents would not be included in search results even if the contents were directly relevant to a search. The software providers may also seek to require us to pay them royalties in exchange for giving us the ability to search documents in their format. If the search platform technology we employ is unable to index proprietary format Web documents as effectively as our competitors’ technology, usage of our search services might decline, which could cause our revenue to fall.

Interruptions, delays, or failures in the provision of our services could harm our operating results.

Delays or disruptions to our service could result from a variety of causes, including the following:

• Our operations are susceptible to outages and interruptions due to fire, flood, earthquake, power loss, telecommunications failures, cyber attacks, terrorist attacks, and similar events.

• The systems through which we provide our products and services are highly technical, complex, and interdependent. Design errors might exist in these systems, or might be introduced as we roll out improvements and upgrades, which might cause service malfunctions or require services to be taken offline while corrective responses are developed.

• Despite our implementation of network security measures, our servers are vulnerable to computer viruses, worms, physical and electronic break-ins, sabotage, and similar disruptions from unauthorized access and tampering, as well as coordinated denial-of-service attacks. We are distributing servers among additional data centers around the world to create redundancies; however, we do not have multiple site capacity for all of our services and some of our systems are not fully redundant in the event of delays or disruptions to service.

• We rely on third-party providers for our principal Internet connections and co-location of a significant portion of our data servers, as well as for our payment processing capabilities and key components or features of our e-mail and VOIP services, news, stock quote and other content delivery, chat services, mapping, streaming, geo-targeting, music, games, and other

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services. We have little or no control over these third-party providers. Any disruption of the services they provide us or any failure of these third-party providers to handle higher volumes of use could, in turn, cause delays or disruptions in our services and loss of revenue. In addition, if our agreements with these third-party providers are terminated for any reason, we might not have a readily available alternative.

Prolonged delays or disruptions to our service could result in a loss of users, damage our brand and harm our operating results. In addition, users’ ability or willingness to access our services might be impaired by spam, viruses, worms, spyware, phishing, and other acts of malice by third parties affecting the user generally or the user’s use of our services in particular.

If we fail to prevent click fraud or if we choose to manage traffic quality in a way that advertisers find unsatisfactory, our profitability may decline.

A portion of our marketing services revenue arises from advertisers that pay for advertising on a price-per-click basis, meaning that the advertisers pay a fee every time a user clicks on their advertising. This pricing model can be vulnerable to so-called “click fraud,” which occurs when clicks are submitted on ads by a user who is motivated by reasons other than genuine interest in the subject of the ad. On Yahoo! Properties and Affiliate sites, we are exposed to the risk of click fraud or other clicks or conversions that advertisers may perceive as undesirable. If fraudulent or other malicious activity is perpetrated by others and we are unable to detect and prevent it, or if we choose to manage traffic quality in a way that advertisers find unsatisfactory, the affected advertisers may experience or perceive a reduced return on their investment in our advertising programs which could lead the advertisers to become dissatisfied with our advertising programs and they might refuse to pay, demand refunds, or withdraw future business. Undetected click fraud could damage our brand and lead to a loss of advertisers and revenue. Moreover, advertiser dissatisfaction has led to litigation alleging click fraud and other types of traffic quality-related claims and could potentially lead to further litigation or government regulation of advertising. Advertisers may also be issued refunds or credits as a result of such activity. Any increase in costs due to any such litigation, government regulation or legislation, or refunds or credits could negatively impact our profitability.

Fluctuations in foreign currency exchange rates affect our operating results in U.S. dollar terms.

A portion of our revenue arises from international operations. Revenue generated and expenses incurred by our international subsidiaries are often denominated in the currencies of the local countries. As a result, our consolidated U.S. dollar financial statements are subject to fluctuations due to changes in exchange rates as the financial results of our international subsidiaries are translated from local currencies into U.S. dollars. In addition, our financial results are subject to changes in exchange rates that impact the settlement of transactions in non-local currencies.

We may be required to record a significant charge to earnings if our goodwill, amortizable intangible assets, or investments in equity interests become impaired.

We are required under generally accepted accounting principles to test goodwill for impairment at least annually and to review our amortizable intangible assets and investments in equity interests for impairment when events or changes in circumstance indicate the carrying value may not be recoverable. Factors that could lead to impairment of goodwill and amortizable intangible assets include significant adverse changes in the business climate (affecting our Company as a whole or affecting any particular segment) and declines in the financial condition of our business. Factors that could lead to impairment of investments in equity interests include a prolonged period of decline in the stock price or operating performance of, or an announcement of adverse changes or events by, the company in which we invested. We have recorded and may be required in the future to record additional charges to earnings if a portion of our goodwill, amortizable intangible assets, or investments in equity interests becomes impaired. Any such charge would adversely impact our financial results.

We may have exposure to additional tax liabilities which could negatively impact our income tax provision, net income, and cash flow.

We are subject to income taxes and other taxes in both the U.S. and the foreign jurisdictions in which we currently operate or have historically operated. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. In addition, there are current proposals for new U.S. tax legislation which, if adopted, could adversely affect the Company’s tax rate. We are subject to regular review and audit by both domestic and foreign tax authorities as well as subject to the prospective and retrospective effects of changing tax regulations and legislation. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our consolidated financial statements and may materially affect our income tax provision, net income, or cash flows in the period or periods for which such determination and settlement is made.

Our stock price has been volatile historically and may continue to be volatile regardless of our operating performance.

The trading price of our common stock has been and may continue to be subject to broad fluctuations. During the three months ended June 30, 2010, the closing sale price of our common stock on the NASDAQ Global Select Market ranged from $13.84 to $18.97 per share and the closing sale price on July 30, 2010 was $13.88 per share. Our stock price may fluctuate in response to a number of events and factors, such as variations in quarterly operating results, announcements and implementations of technological innovations or new services by us or our competitors; changes in financial estimates and recommendations by securities analysts; the operating and

44

stock price performance of other companies that investors may deem comparable to us; the operating performance of companies in which we have an equity investment, including Yahoo Japan Corporation (“Yahoo Japan”) and Alibaba Group Holding Limited (“Alibaba Group”); and news reports relating to us, trends in our markets, or general economic conditions.

In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options or other stock-based awards. A sustained decline in our stock price and market capitalization could lead to an impairment charge of our long-lived assets.

Anti-takeover provisions could make it more difficult for a third-party to acquire us.

We have adopted a stockholder rights plan and initially declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of March 20, 2001. As a result of our two-for-one stock split effective May 11, 2004, each share of common stock is now associated with one-half of one right. Each right entitles the holder to purchase one unit consisting of one one-thousandth of a share of our Series A Junior Participating Preferred Stock for $250 per unit. Under certain circumstances, if a person or group acquires 15 percent or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $250 exercise price, shares of our common stock or of any company into which we are merged having a value of $500. The rights expire on March 1, 2011, unless extended by our Board of Directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our rights plan could make it more difficult for a third-party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding that acquisition.

In addition, our Board of Directors has the authority to issue up to 10 million shares of Preferred Stock (of which 2 million shares have been designated as Series A Junior Participating Preferred Stock) and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders.

The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may have the effect of delaying, deterring or preventing a change in control of Yahoo! without further action by the stockholders and may adversely affect the voting and other rights of the holders of our common stock. Further, some provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Yahoo!, which could have an adverse effect on the market price of our stock. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third-party to gain control of our Board of Directors. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change in control of Yahoo!.

45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share repurchase activity during the three months ended June 30, 2010 was as follows:

Period	Total Number of Shares Purchased (*)	Average Price  Paid per Share		Total Number of Shares  Purchased as Part of a Publicly Announced Program	Approximate Dollar Value of Shares that May Yet be Purchased Under the October 2006 Program (in 000s) (*)
April 1 — April 30, 2010	2,397,450	$	16.61	2,397,450	$	548,417
May 1 — May 31, 2010	12,437,990	$	15.88	12,437,990	$	350,923
June 1 — June 30, 2010	17,070,413	$	15.16	17,070,413	$	92,082
Total	31,905,853	$	15.55	31,905,853

^(*) The shares repurchased in the three months ended June 30, 2010 were under our stock repurchase program that was announced in October 2006 with an authorized level of $3 billion. This program, according to its terms, will expire in October 2011. Repurchases may take place in the open market or in privately negotiated transactions, including derivative transactions, and may be made under a Rule 10b5-1 plan.

On June 24, 2010, the Company’s Board of Directors approved a new stock repurchase program. Under the program, which expires in June 2013, the Company is authorized to repurchase up to $3 billion of its outstanding shares of common stock from time to time. The repurchases may take place in the open market or in privately negotiated transactions, including derivative transactions, and may be made under a Rule 10b5-1 plan. Repurchases made subsequent to June 30, 2010 exhausted the authorization remaining under the October 2006 program. No purchases were made under the new program during the three months ended June 30, 2010. See Note 16 – “Subsequent Events” in the Notes to the condensed consolidated financial statements in this quarterly report for share repurchase activity subsequent to June 30, 2010.

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed in the Index to Exhibits (following the signatures page of this Report) are filed with, or incorporated by reference in, this Report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	YAHOO! INC.
Dated: August 9, 2010	By:	/S/    CAROL BARTZ
		Carol Bartz
		Chief Executive Officer
Dated: August 9, 2010	By:	/S/    TIMOTHY R. MORSE
		Timothy R. Morse
		Chief Financial Officer (Principal Financial Officer)

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YAHOO! INC.

Index to Exhibits

Exhibit Number	Description
3.1(A)	Amended and Restated Certificate of Incorporation of the Registrant (previously filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed July 28, 2000 and incorporated herein by reference).
3.1(B)	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant (included as Exhibit A within the Amended and Restated Rights Agreement, filed as Exhibit 4.1 below).
3.2	Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed February 6, 2009 and incorporated herein by reference).
4.1	Amended and Restated Rights Agreement (including the form of Rights Certificate), dated as of April 1, 2005, by and between the Registrant and Equiserve Trust Company, N.A., as rights agent (previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed April 4, 2005 and incorporated herein by reference).
10.4(A) +*	Yahoo! Inc. 1996 Directors’ Stock Plan, as amended and restated June 24, 2010.
10.4(B) +*	Form of Director Nonstatutory Stock Option Agreement, including Notice of Stock Option Grant, under the Yahoo! Inc. 1996 Directors’ Stock Plan.
10.4(C) +*	Form of Director Restricted Stock Unit Award Agreement, including Notice of Restricted Stock Unit Grant, under the Yahoo! Inc. 1996 Directors’ Stock Plan.
31.1*	Certificate of Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 9, 2010.
31.2*	Certificate of Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 9, 2010.
32*	Certificate of Chief Executive Officer and Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(b) and 15d-14(b) and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 9, 2010.
101.INS*‡	XBRL Instance
101.SCH*‡	XBRL Taxonomy Extension Schema
101.CAL*‡	XBRL Taxonomy Extension Calculation
101.DEF*‡	XBRL Taxonomy Extension Definition
101.LAB*‡	XBRL Taxonomy Extension Labels
101.PRE*‡	XBRL Taxonomy Extension Presentation

* Filed herewith.

+ Indicates a management contract or compensatory plan or arrangement.

‡ Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions or other liability provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. In addition, users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

48

EX-10.4(A)

Exhibit 10.4(A)

YAHOO! INC.

1996 DIRECTORS’ STOCK PLAN

(as amended and restated June 24, 2010)

1. Purposes of the Plan. The purposes of this 1996 Directors’ Stock Plan are to attract and retain the best available personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board.

Subject to approval of the amendments to the Plan reflected in this document by the Company’s stockholders at the Company’s 2010 Annual Meeting of stockholders, this version of the Plan is effective on and after the Effective Date, and Awards granted on or after the Effective Date shall be made under this version of the Plan and not under the Plan as previously in effect. For the terms and conditions of the Plan applicable to Awards granted under the Plan before the Effective Date (except as expressly provided herein), refer to the version of the Plan in effect as of the date such Award was granted.

2. Definitions. As used herein, the following definitions shall apply:

“Annual Meeting” means the annual meeting of the Company’s stockholders for the applicable year. If more than one such meeting occurs for a particular year, the Annual Meeting for that year means only the first such meeting for that year. In the event that an Annual Meeting for a particular year is adjourned, the date of the Annual Meeting for that year for purposes of the Plan shall be the date that corresponds to the portion of Annual Meeting at which Directors were elected.

“Applicable Laws” means any legal requirements of all state and federal laws, including without limitation securities laws and the Code, relating to the administration of stock incentive plans such as the Plan.

“Award” means an award of Options or Restricted Stock Units (each as defined below).

“Board” means the Board of Directors of the Company.

“Code” means the Internal Revenue Code of 1986, as amended.

“Common Stock” means the common stock of the Company.

“Company” means Yahoo! Inc., a Delaware corporation.

“Continuous Service as a Director” means the absence of any interruption or termination of service as a Director.

“Director” means a member of the Board.

“Director Fees” means the amount of all compensation payable to a Director for services as a member of the Board (including service on any Board committee) that, but for any election made by such Director to receive such compensation in the form of an Award under Section 11 of the Plan, would have been payable in cash to such Director.

“Effective Date” means the date of the 2010 Annual Meeting.

“Employee” means any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of compensation by the Company for service as a Director does not, alone, constitute “employment” of the Director by the Company.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Fair Market Value” means, as of any date, the fair market value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the Nasdaq Global Market and Nasdaq Global Select Market, its Fair Market Value shall be the closing sales price for such stock as quoted on such exchange or system on the date of determination (if for a given day no sales were reported, the closing sales price for a share of Common Stock for the next preceding day on which sales of Common Stock were reported shall be used), as such price is reported in The Wall Street Journal or such other source as the Board deems reliable;

(ii) If the Common Stock is listed on the Nasdaq Stock Market (but not on the Nasdaq Global Market or Nasdaq Global Select Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the bid and asked prices for the Common Stock on the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; or

(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

“Option” means a stock option granted pursuant to the Plan. All Options shall be nonstatutory stock options (i.e., options that are not intended to qualify as incentive stock options under Section 422 of the Code).

“Outside Director” means a Director who is not an Employee.

“Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

“Participant” means an Outside Director who receives an Award.

“Plan” means this 1996 Directors’ Stock Plan (formerly known as the “1996 Directors’ Stock Option Plan”).

“Restricted Stock Unit” means the right to receive one Share, subject to the terms and conditions hereof.

“Share” means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan.

“Stock Exchange” means any stock exchange or consolidated stock price reporting system on which prices for the Common Stock are quoted at any given time.

“Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

“Total Disability” means a total and permanent disability within the meaning of Section 22(e)(3) of the Code.

“Vesting Date” with respect to a particular Award granted pursuant to Section 4(b)(ii) means the last day of each of the four three-month periods following the date on which the Award is granted; provided, however, that the fourth such “Vesting Date” as to the Award shall be the first to occur of the first anniversary of the date of grant of the Award or the day before the Annual Meeting for the calendar year following the year in which the Award is granted.

3. Stock Subject to the Plan.

(a) Share Limits. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be issued under the Plan (including Shares issued before the Effective Date) is 8,800,000 Shares (the “Pool”) of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. Shares issued in payment of any Restricted Stock Units granted under the Plan shall be counted against the Pool as 1.75 shares for every one Share actually issued in payment of such Restricted Stock Units. (For example, if 100 Shares were issued in payment of Restricted Stock Units granted under the Plan, 175 Shares shall be charged against the Pool in connection with that payment.)

(b) Reissue of Shares. To the extent that an Award is settled in cash or a form other than Shares, the Shares that would have been delivered had there been no such cash or other settlement shall not be counted against the Shares available for issuance under the Plan. In the event that shares of Common Stock are delivered in respect of a Dividend Equivalent right granted under the Plan, only the actual number of shares delivered with respect to the Award shall be counted against the share limits of the Plan. (For purposes of clarity, if 1,000 Dividend Equivalent rights are granted and outstanding when the Company pays a dividend, and 50 shares are delivered in payment of those rights with respect to that dividend, 50 shares shall be counted against the Pool.) In connection with the exercise of an Option, the

number of underlying Shares as to which the exercise relates shall be counted against the applicable Share limits under Section 3(a), as opposed to only counting the Shares actually issued. (For purposes of clarity, if an Option relates to 100,000 Shares and is exercised in full at a time when the net number of Shares due to the Participant (after any netting of Shares to cover the exercise price and/or tax withholding) is 15,000 Shares, 100,000 Shares shall be counted against the Pool with respect to such exercise.) Shares that are exchanged by a Participant or withheld by the Company as full or partial payment in connection with any Award under the Plan, as well as any Shares exchanged by a Participant or withheld by the Company or one of its Subsidiaries to satisfy the tax withholding obligations related to any Award, shall not be available for subsequent Awards under the Plan. Shares that are subject to or underlie Awards which expire or for any reason are cancelled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under the Plan shall again be available for subsequent Awards under the Plan.

4. Administration of and Grants of Awards Under the Plan.

(a) Administrator. Except as otherwise required herein, the Plan shall be administered by the Board.

(b) Procedure for Grants. Except as provided in Section 11, all grants of Awards hereunder shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions:

(i) Subject to the Board’s amendment authority pursuant to Section 15(a), no person shall have any discretion to select which Outside Directors shall be granted Awards or to determine the number of Shares to be covered by Awards granted to Outside Directors.

(ii) On the date of each Annual Meeting of the Company’s Stockholders which occurs on or after the Effective Date and immediately following which an Outside Director is serving on the Board, such Outside Director shall be automatically granted an Award of a number of Restricted Stock Units determined by dividing (A) $220,000 by (B) the Fair Market Value of the Common Stock on the date of grant, such number to be rounded down to the nearest whole number of Restricted Stock Units.

(iii) In addition, each Outside Director who first becomes an Outside Director at any time on or after the Effective Date and other than in connection with an Annual Meeting shall be automatically granted, on the date he or she first becomes an Outside Director, an Award of a number of Restricted Stock Units determined by multiplying (A) the quotient obtained by dividing $220,000 by the Fair Market Value of the Common Stock on the date of grant, by (B) a fraction, the numerator of which shall be the number of days remaining in the 365-day period following the most recent Annual Meeting, and the denominator of which shall be 365 (but in no

event shall such fraction be greater than one (1)), such number to be rounded down to the nearest whole number of Restricted Stock Units; provided, however, that an Outside Director shall not be eligible to receive an Award pursuant to this Section 4(b)(iii) if he or she was an Employee at any time during the six (6) month period ending with the date on which he or she first became an Outside Director.

(iv) Notwithstanding the provisions of subsections (ii) and (iii), in the event that the automatic grant of one or more Awards on any given date pursuant to either such subsection would cause the number of Shares subject to outstanding Awards plus the number of Shares previously delivered in respect of Awards granted under the Plan to exceed the Pool, then the number of Shares to be subject to any Award granted on such date shall be determined by multiplying (A) the total number of Shares remaining available under the Plan before giving effect to any Award grants on such date, by (B) a fraction, the numerator of which shall be the number of Shares that would otherwise be subject to such Award pursuant to subsection (ii) or (iii) hereof, as applicable, and the denominator of which shall be the number of Shares that would otherwise be subject to all Awards automatically granted on such date pursuant to such subsection. Any further automatic grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Awards previously granted hereunder.

(v) Any Restricted Stock Unit Award granted under subsection (ii) shall become non-forfeitable in installments as to one-fourth of the Restricted Stock Units subject to the Award on each Vesting Date applicable to the Award. Any Restricted Stock Unit Award granted under subsection (iii) shall become non-forfeitable in a number of installments equal to the number of Vesting Dates (determined with reference to the Awards granted under subsection (ii) at the last Annual Meeting to occur) from the date of grant of such Award through and including the next Annual Meeting, with a portion of the Award (determined by dividing the total number of Restricted Stock Units subject to the Award by the number of such installments) to become non-forfeitable on each such Vesting Date. All Restricted Stock Unit Awards granted hereunder shall be paid in accordance with Section 10 of the Plan. In addition, each Award granted under the Plan that is outstanding and unvested on the Effective Date shall continue to vest as otherwise scheduled pursuant to the terms of the Plan as in effect at the time such Award was granted; provided, however, that as to any such Award that was previously granted in connection with an Annual Meeting (as opposed to the date the recipient first became an Outside Director), the fourth and final installment of the Award shall vest on the first to occur of the first anniversary of the date of grant of the Award or the day before the Annual Meeting for the calendar year following the year in which the Award is granted, provided that the recipient of the Award serves on the Board until the applicable vesting date.

(vi) The Board may at any time prospectively change the timing, grant levels, vesting and other provisions of the automatic grants provided in this Section 4(b) without stockholder approval. For avoidance of doubt, the Board may provide on a prospective basis for such automatic grants to consist of Options only, Restricted Stock Unit Awards only, or a combination of Options and Restricted Stock Unit Awards on such terms and conditions, subject to the share limits of Section 3 and the other express limits of the Plan, as may be established by the Board.

(c) Powers of the Board. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with the provisions hereof, the Fair Market Value of the Common Stock; (ii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Award previously granted hereunder; and (vi) to make all other determinations deemed necessary or advisable for the administration of the Plan. The Board has discretion to accelerate the vesting of any or all Awards granted under the Plan in such circumstances as it, in its discretion, deems appropriate.

(d) Effect of Board’s Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Participants and any other holders of any Awards granted under the Plan.

(e) Suspension or Termination of Award. If the Board reasonably believes that a Participant has committed an act of misconduct, the Board may suspend the Participant’s right to exercise any Option or otherwise receive any Shares or other payment in respect of any Award granted to such Participant pending a determination by the Board. If the Board (excluding the Participant accused of such misconduct) determines a Participant has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if a Participant makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Participant nor his or her estate shall be entitled to exercise or receive payment of any Award whatsoever. In making such determination, the Board shall act fairly and shall give the Participant an opportunity to appear and present evidence on the Participant’s behalf at a hearing before the Board or a committee of the Board.

5. Eligibility. Awards may be granted only to Outside Directors. Except as provided in Section 11, all Awards shall be automatically granted in accordance with the terms set forth in Section 4(b) hereof. An Outside Director who has been granted an Award may, if he or she is otherwise eligible, be granted an additional Award or Awards in accordance with such provisions. The Plan shall not confer upon any Outside Director any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time.

6. Term of Plan. The Plan shall continue in effect until September 1, 2019 unless sooner terminated under Section 15 of the Plan.

7. Term of Options. The term of each Option shall be seven (7) years from the date of grant thereof.

8. Option Exercise Price and Consideration.

(a) Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be 100% of the Fair Market Value per Share on the date of grant of the Option.

(b) Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option shall consist entirely of cash, check, other Shares of Common Stock having a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised (which, if acquired from the Company, shall have been held for at least six months), delivery of a properly executed notice of exercise together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price, or any combination of such methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law.

9. Exercise of Option.

(a) Procedure for Exercise; Rights as a Stockholder. Except as provided in Section 11(a), any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) hereof. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company (or such other administrative exercise procedures as the Board may implement from time to time have been completed) by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 8(b) hereof. Until such Shares are actually issued to and held of record by the Participant, the Participant shall have no right to vote or receive

dividends or any other rights as a stockholder with respect to such Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date such Shares are issued, except as provided in Section 13. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(b) Accelerated Vesting on Death or Disability. If the Outside Director ceases to serve as a Director due to the Director’s death or Total Disability, his or her Options, to the extent then outstanding and unvested, shall be fully vested and exercisable as of the date of such cessation of service.

(b) Termination of Status as a Director. If an Outside Director ceases to serve as a Director for any reason, he or she may, but only within one (1) year after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination (after giving effect to any acceleration of vesting that may apply in the circumstances). Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that an Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate.

10. Restricted Stock Units.

(a) Lapse of Restrictions; Termination of Service. Subject to this Section 10(a) and except as otherwise provided in Section 11(b), any Award of Restricted Stock Units granted hereunder shall become non-forfeitable at such times as are set forth in Section 4(b) hereof. In the event of the termination of a Participant’s Continuous Service as a Director for any reason, any Restricted Stock Units held by such Participant as to which the restrictions in accordance with Section 4(b) hereof have not lapsed prior to the termination of the Participant’s Continuous Service as a Director shall be automatically forfeited by the Participant as of the date of such termination; provided, however, that if such termination is due to the Participant’s death or Total Disability, his or her Restricted Stock Units, to the extent then outstanding and unvested, shall be fully vested as of the date of such termination. Neither the Participant nor any of the Participant’s successors, heirs, assigns or personal representatives shall have any rights or interests in any Restricted Stock Units that are so forfeited.

(b) No Rights as a Stockholder. Restricted Stock Units are bookkeeping entries only. A Participant who is awarded Restricted Stock Units shall possess no incidents of ownership with respect to such Restricted Stock Units, except as expressly provided in Section 10(c) with respect to dividend equivalent rights.

(c) Dividend Equivalent Rights. As of any date that the Company pays an ordinary cash dividend on its Common Stock, each Participant shall automatically be granted under the Plan a number of additional Restricted Stock Units equal to (i) the per share cash dividend paid by the Company on its Common Stock on such date, multiplied by (ii) the number of outstanding and unpaid Restricted Stock Units (whether or not non-forfeitable) held by such Participant under the Plan as of the related dividend payment record date, divided by (iii) the Fair Market Value of a share of Common Stock on the date of payment of such dividend. Any Restricted Stock Units granted pursuant to the foregoing provisions of this Section 10(c) shall be subject to the same vesting, payment (including, without limitation, any election by the Participant to defer payment pursuant to Section 10(e)) and other terms, conditions and restrictions as the original Restricted Stock Units to which they relate.

(d) Timing and Manner of Payment of Restricted Stock Units. Subject to Sections 10(e) and 13(b) hereof, with respect to any Restricted Stock Units granted to a Participant that become non-forfeitable pursuant to the terms hereof, such Restricted Stock Units shall be paid on or as soon as practicable after (and in all events within two and one-half months after) the earlier of (i) the date such Participant’s Continuous Service as a Director terminates, or (ii) the last Vesting Date applicable to the Award of such Restricted Stock Units (the earlier of such dates, the “Payment Date”), such payment to be made by the Company delivering to the Participant a number of Shares equal to the number of the Restricted Stock Units being paid on the Payment Date. The Company shall issue the Shares either (i) in certificate form or (ii) in book entry form, registered in the name of the Participant. Delivery of any certificates will be made to the Participant’s last address reflected on the books of the Company unless the Company is otherwise instructed in writing. Neither the Participant nor any of the Participant’s successors, heirs, assigns or personal representatives shall have any further rights or interests in any Restricted Stock Units that are so paid.

(e) Deferral of Payment of Restricted Stock Units. Notwithstanding any provision of Section 10(d) or 11(b) to the contrary, a Participant granted an Award of Restricted Stock Units under the Plan may irrevocably elect, not later than the December 31 that precedes the calendar year in which such Award is granted and on a form and in a manner prescribed by the Company, that such Restricted Stock Units shall be paid on (i) the date such Participant’s Continuous Service as a Director terminates, (ii) any date elected by the Participant that is not earlier than January 1 of the second year following the year in which the Award is granted, or (iii) the first to occur of the dates referred to in the foregoing clauses (i) and (ii). In the event of any such election, the payment date timely elected by the Participant shall be the “Payment Date” with respect to the Restricted Stock Units covered by the election.

11. Awards in Lieu of Cash Payment of Fees. Prior to the December 31 that precedes the calendar year during which any Director Fees are earned by an Outside Director (or such earlier date as may be prescribed by the Company), the Outside Director may elect, on a form and in a manner prescribed by the Company, to exchange the right to receive payment of such Director Fees in cash for the grant of an Award under the Plan pursuant to either Section 11(a) or 11(b) below.

(a) Stock Option. The Outside Director may elect to be granted an Option with respect to the number of Shares determined by dividing (i) three (3) times the amount of the Director Fees being exchanged for the Option, by (ii) the Fair Market Value of a Share as of the date of such exchange. The Option shall be granted on the last day of the calendar quarter for which the applicable Director Fees would have otherwise been paid (or such other date as the Board may determine appropriate) and shall be exercisable immediately upon the date of grant. Except as expressly provided herein, any Option granted pursuant to this Section 11(a) shall be subject to all of the provisions of the Plan applicable to Options granted under the Plan.

(b) Restricted Stock Unit Award. The Outside Director may elect to be granted an Award of Restricted Stock Units. The number of Restricted Stock Units to be covered by such Award shall be determined by dividing (i) the amount of the Director Fees being exchanged for the Award, by (ii) the Fair Market Value of a Share as of the date of such exchange. The Restricted Stock Units shall be granted on the last day of the calendar quarter for which the applicable Director Fees would have otherwise been paid (or such other date as the Board may determine appropriate). Such Restricted Stock Units shall be fully non-forfeitable as of the date of grant. Subject to Sections 10(e) and 13(b) hereof, such Restricted Stock Units shall be paid on or as soon as practicable after (and in all events within two and one-half months after) the earlier of (i) the date such Participant’s Continuous Service as a Director terminates, or (ii) the first anniversary of the date such Restricted Stock Units are granted (the earlier of such dates, the “Payment Date”), such payment to be made by the Company delivering to the Participant a number of Shares equal to the number of the Restricted Stock Units being paid on the Payment Date.¹ Except as expressly provided herein, any Restricted Stock Units granted pursuant to this Section 11(b) shall be subject to all of the provisions of the Plan applicable to Awards of Restricted Stock Units granted under the Plan.

12. Nontransferability of Awards. Awards granted under the Plan may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined by the Code or the rules thereunder). The designation of a beneficiary by a Participant does not constitute a transfer. An Option may be exercised during the lifetime of a Participant only by the Participant or a transferee permitted by this Section 12.

¹ For purposes of clarity, this payment schedule applies to the payment of Restricted Stock Units granted in lieu of Director Fees earned by a Participant during 2011 and thereafter. The “Payment Date” for Restricted Stock Units granted in lieu of Director Fees earned by a Participant during 2010 will be the earlier of (i) the date such Participant’s Continuous Service as a Director terminates, or (ii) the third anniversary of the date such Restricted Stock Units are granted (subject to any deferral election made by the Participant pursuant to the Plan as to such Restricted Stock Units or earlier payment of such Restricted Stock Units pursuant to Section 13(b) in connection with a Corporate Transaction).

13. Adjustments upon Changes in Capitalization; Corporate Transactions.

(a) Adjustments. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Award, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award, as well as the price per share of Common Stock covered by each outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to any Award.

(b) Corporate Transactions. In the event of (i) a dissolution or liquidation of the Company, (ii) a sale of all or substantially all of the Company’s assets, (iii) a merger or consolidation in which the Company is not the surviving corporation, or (iv) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged (a “Corporate Transaction”), at the time of adoption of the plan for such Corporate Transaction, the Company shall:

• in the case of outstanding Options, provide for either a reasonable time thereafter within which to exercise the Option, including Shares as to which the Option would not be otherwise exercisable, prior to the effectiveness of such Corporate Transaction, at the end of which time the Option shall terminate, or the right to exercise the Option, including Shares as to which the Option would not be otherwise exercisable (or receive a substitute option with comparable terms), as to an equivalent number of shares of stock of the corporation succeeding the Company or acquiring its business by reason of such Corporate Transaction; and

• in the case of outstanding Restricted Stock Units, provide that, immediately prior to the effectiveness of such Corporate Transaction, all such Restricted Stock Units (A) to the extent that such Restricted Stock Units are not then non-forfeitable, shall become non-forfeitable, and (B) shall be paid in an equivalent number of Shares; provided, however, that

payment shall be made in respect of a Corporate Transaction pursuant to the foregoing clause (B) only if such Corporate Transaction constitutes a “change in the ownership or effective control” of the Company or a “change in the ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A(a)(2)(A)(v) of the Code; and provided further, that in the event the foregoing proviso is not satisfied, payment shall be made at the time otherwise provided herein.

14. Time of Granting Awards. The date of grant of an Award shall, for all purposes, be the date determined in accordance with Section 4(b) or Section 11 hereof, as applicable. Notice of the determination shall be given to each Outside Director to whom an Award is so granted within a reasonable time after the date of such grant.

15. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided, that no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder approval if such approval is necessary to comply with any tax, securities or regulatory law or requirement or any applicable Stock Exchange requirement with which the Board intends the Plan to comply or if such amendment constitutes a “material amendment.” For purposes of the Plan, a “material amendment” shall mean an amendment that (i) materially increases the benefits accruing to Participants under the Plan, (ii) materially increases the number of securities that may be issued under the Plan, (iii) materially modifies the requirements for participation in the Plan, or (iv) is otherwise deemed a material amendment by the Board pursuant to any Applicable Law or applicable accounting or Stock Exchange rules; provided, however, that the Board may, in its sole discretion but subject to the share limits of Section 3 and the other express limits of the Plan, at any time prospectively make any of the changes contemplated by Section 4(b)(vi) above without the approval of the Company’s stockholders, and any such change shall not be considered a “material amendment” for purposes of this Section 15(a).

(b) Amendments to Awards. Without limiting any other express authority of the Board under (but subject to) the express limits of the Plan, the Board may waive conditions of or limitations on Awards that the Board in the prior exercise of its discretion has imposed, without the consent of the Award recipient, and (subject to the requirements of Section 15(c)) may make other changes to the terms and conditions of Awards. Notwithstanding the foregoing and except for an adjustment pursuant to Section 13(a) or a repricing approved by stockholders, in no case may the Board (1) amend an outstanding Option to reduce the exercise price or grant price of the Award, (2) provide for the cancellation, exchange, or surrender of an outstanding Option in exchange for cash or other awards for the purpose of repricing the Award, or (3) provide for the cancellation, exchange, or surrender an outstanding Option in exchange for an Option with an exercise or grant price that is less than the exercise or grant price of the original Award.

(c) Limitations on Amendments to Plan and Awards. No amendment, suspension or termination of the Plan or change of or affecting any outstanding Award shall, without written consent of the Award recipient, affect in any manner materially adverse to such recipient any rights or benefits of such recipient or obligations of the Company under any Award granted under the Plan prior to the effective date of such change. Changes, settlements and other actions contemplated by Section 13 shall not be deemed to constitute changes or amendments for purposes of this Section 15(c).

16. Conditions upon Issuance of Shares. Shares shall not be issued pursuant to the exercise or payment of any Award granted under the Plan unless the exercise or payment of such Award and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any Stock Exchange, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise or payment of any Award, the Company may require the person exercising or receiving payment of such Award to represent and warrant at the time of any such exercise or payment that the Shares are being acquired only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.

17. Reservation of Shares. The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

18. Award Agreement. Awards shall be evidenced by written award agreements in such form as the Board shall approve.

19. Unfunded Status of Plan. The Plan is intended to constitute an “unfunded” plan for incentive compensation. With respect to any payments not yet made to a participant by the Company, nothing contained herein shall give any such participant any rights that are greater than those of a general creditor of the Company.

20. Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware, without giving effect to the conflict of laws principles thereof.

21. Construction. The Plan and any agreement evidencing any Award granted hereunder shall be construed and interpreted to comply with Section 409A of the Code. The Company reserves the right to amend the Plan and any such agreement to the extent it reasonably determines is necessary in order to preserve the intended tax consequences of Awards granted hereunder in light of Section 409A of the Code and any regulations or other guidance promulgated thereunder.

EX-10.4(B)

Exhibit 10.4(B)

YAHOO! INC.

1996 DIRECTORS’ STOCK PLAN

NOTICE OF STOCK OPTION GRANT

[                    ]

c/o Yahoo! Inc.

701 First Avenue

Sunnyvale, CA 94089

You have been granted an option to purchase Common Stock of Yahoo! Inc. (the “Company”) as follows:

Date of Grant:	[                    ]
Exercise Price per Share:	[$                ]
Total Number of Shares Granted:	[                    ]
Expiration Date:	[                    ]
Vesting Schedule:	This Option shall be fully vested and exercisable as of the Date of Grant.
Post-Termination Exercise Period:	This Option may be exercised for one year after termination of your Continuous Status as a Director for any reason, but in no event later than the Expiration Date as provided above.

By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the 1996 Directors’ Stock Plan and the Director Nonstatutory Stock Option Agreement, both of which are attached and made a part of this document.

OPTIONEE:	YAHOO! INC.
	By:
Signature
	Title:
Print Name

YAHOO! INC.

DIRECTOR NONSTATUTORY STOCK OPTION AGREEMENT

1. Grant of Option. The Company hereby grants to the Optionee named in the Notice of Stock Option Grant attached as Part I of this Agreement (the “Optionee”), an option (the “Option”) to purchase a number of Shares, as set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the “Exercise Price”), subject to the terms and conditions of the 1996 Directors’ Stock Plan, as amended (the “Plan”), which is incorporated herein by reference. (Capitalized terms not defined herein shall have the meanings ascribed to such terms in the Plan.) In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Director Nonstatutory Stock Option Agreement (this “Agreement”), the terms and conditions of the Plan shall prevail.

2. Exercise of Option.

(a) Right to Exercise; No Fractional Shares. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and the applicable provisions of the Plan and this Agreement. In the event of the Optionee’s death, disability or other termination of the Optionee’s Continuous Service as a Director, the exercisability of the Option is governed by the applicable provisions of the Plan and this Agreement. Fractional share interests shall be disregarded, but may be cumulated.

(b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

(a) cash;

(b) check;

(c) delivery of a properly executed Exercise Notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price; provided that the Board may from time to time limit the availability of any non-cash payment alternative; or

(d) surrender of other Shares which (a) in the case of shares initially acquired from the Company (upon exercise of a stock option or otherwise), have been owned by the Optionee for such period (if any) as may be required to avoid a charge to the Company’s earnings, and (b) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.

4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution or pursuant to a domestic relations order (as defined by the Code or the rules thereunder) and may be exercised during the lifetime of the Optionee only by the Optionee or a transferee permitted by Section 12 of the Plan. The terms of the Plan and this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

5. Term of Option; Corporate Transaction. This Option may be exercised only within the term set out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Agreement. Notwithstanding any other provision herein, in the event of a Corporate Transaction, this Option shall become fully vested and may be subject to early termination as provided in Section 13(b) of the Plan.

6. Tax Consequences. Set forth below is a brief summary of certain federal and California tax consequences relating to this Option under the law in effect as of the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

(a) Exercising the Option. Since this Option does not qualify as an incentive stock option under Section 422 of the Code, the Optionee may incur ordinary federal and California income tax liability upon exercise. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price.

(b) Disposition of Shares. If the Optionee holds the Exercised Shares for more than one year, gain realized on disposition of the Shares will be treated as long-term capital gain for federal and California income tax purposes.

By your signature and the signature of the Company’s representative on the Notice of Stock Option Grant attached as Part I of this Agreement, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Agreement. You acknowledge and agree that you have reviewed the Plan and this Agreement in their entirety, have had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understand all provisions of the Plan and this Agreement. You hereby agree to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions relating to the Plan and this Agreement.

CONSENT OF SPOUSE

The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Agreement. In consideration of the Company’s granting his or her spouse the right to purchase Shares as set forth in the Plan and this Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned’s spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Agreement.

Spouse of Optionee

EXHIBIT A

NOTICE OF EXERCISE

To:	Yahoo! Inc.
Attn:	Stock Plan Services
Subject:	Notice of Intention to Exercise Stock Option

This is official notice that the undersigned (“Optionee”) intends to exercise Optionee’s option to purchase                      shares of Yahoo! Inc. Common Stock, under and pursuant to the Company’s 1996 Directors’ Stock Plan and the Director Nonstatutory Stock Option Agreement dated                     , as follows:

Grant Number:

Date of Purchase:

Number of Shares:

Purchase Price:

Method of Payment of

Purchase Price:

Social Security No.:

The shares should be issued as follows:

Name:

Address:

Signed:

Date:

EX-10.4(C)

Exhibit 10.4(C)

YAHOO! INC.

1996 DIRECTORS’ STOCK PLAN

NOTICE OF RESTRICTED STOCK UNIT GRANT

[                    ]

c/o Yahoo! Inc.

701 First Avenue

Sunnyvale, CA 94089

You have been granted an award of Restricted Stock Units by Yahoo! Inc. (the “Company”) as follows:

Date of Grant:	[                    ]
Total Number of Restricted Stock Units Granted:	[                ]
Vesting Schedule:	[For annual grants: The Restricted Stock Units shall vest and become non-forfeitable in four equal installments at the end of each three-month period following the Date of Grant, provided, that the fourth such installment shall vest and become non-forfeitable on the first to occur of the first anniversary of the Date of Grant or the day before the next annual meeting of the Company’s stockholders that follows the Date of Grant. (The date on which each such installment vests is referred to as a “Vesting Date.”)]
	[For initial grants. To be modified as appropriate to reflect the applicable number of vesting dates and installments: The Restricted Stock Units shall vest and become non-forfeitable in [            ] equal installments on each of [                    ], [                    ], [                    ] and [                    ] (or, if earlier, the day before the next annual meeting of the Company’s stockholders that follows the Date of Grant). (The date on which each such installment vests is referred to as a “Vesting Date.”)]
	[For grants in lieu of cash fees: The Restricted Stock Units shall be fully vested as of the Date of Grant.]

By your signature and the signature of the Company’s representative below, you and the Company agree that the Restricted Stock Units are granted under and governed by the terms and conditions of the 1996 Directors’ Stock Plan and the Restricted Stock Unit Award Agreement, both of which are attached and made a part of this document.

GRANTEE:	YAHOO! INC.
	By:
Signature
	Title:
Print Name

YAHOO! INC.

DIRECTOR RESTRICTED STOCK UNIT AWARD AGREEMENT

1. Grant of Restricted Stock Unit Award. The Company hereby grants to the Grantee named in the Notice of Restricted Stock Unit Grant attached as Part I of this Agreement (the “Grantee”), an award (the “Award”) of Restricted Stock Units, as set forth in the Notice of Restricted Stock Unit Grant, subject to the terms and conditions of the 1996 Directors’ Stock Plan, as amended (the “Plan”), which is incorporated herein by reference. (Capitalized terms not defined herein shall have the meanings ascribed to such terms in the Plan.) In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Restricted Stock Unit Award Agreement (this “Agreement”), the terms and conditions of the Plan shall prevail.

2. Limitations on Rights Associated with Restricted Stock Units; Dividend Equivalent Rights. The Restricted Stock Units are bookkeeping entries only. The Grantee shall have no rights as a stockholder of the Company, no dividend rights and no voting rights with respect to the Restricted Stock Units. Notwithstanding the foregoing, as of any date the Company pays an ordinary cash dividend on its Common Stock, the Grantee shall automatically be granted a number of additional Restricted Stock Units in respect of any then-outstanding and unpaid Restricted Stock Units granted hereunder as provided in Section 10(c) of the Plan. Any such additional Restricted Stock Units shall be subject to the same vesting, payment and other terms, conditions and restrictions as the original Restricted Stock Units to which they relate.

3. Transfer Restrictions. The Restricted Stock Units, and any interest therein, may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution. Any attempt to dispose of any Restricted Stock Units in contravention of the above restriction shall be null and void and without effect.

4. Lapse of Restrictions; No Fractional Interests. The Restricted Stock Units shall vest and become nonforfeitable in accordance with the Vesting Schedule set out in the Notice of Restricted Stock Unit Grant and the applicable provisions of the Plan and this Agreement. Fractional share interests shall be disregarded, but may be cumulated.

5. Timing and Manner of Payment of Restricted Stock Units. Subject to Sections 6 and 8 below, as soon as practicable after (and in all events within two and one-half months after) the earlier of (i) the date the Grantee’s Continuous Service as a Director terminates for any reason, or (ii) [For initial and annual grants: the last Vesting Date of the Award] [For grants in lieu of cash fees before January 1, 2011: the third anniversary of the Date of Grant] [For grants in lieu of cash fees on or after January 1, 2011: the first anniversary of the Date of Grant] set forth in the Notice of Restricted Stock Unit Grant (the earlier to occur of such dates, the “Payment Date”), any Restricted Stock Units subject to the Award that have vested and become non-forfeitable pursuant to Section 4 shall be paid by the Company delivering to the Grantee, a number of Shares equal to the number of such Restricted Stock Units being paid. The Company shall issue the Shares as provided in Section 10(d) of the Plan. Notwithstanding the

foregoing, the Company shall have no obligation to issue Shares in payment of the Restricted Stock Units unless such issuance and such payment shall comply with all relevant provisions of law and the requirements of any Stock Exchange.

6. Deferral of Payment of Restricted Stock Units. Notwithstanding the first sentence of Section 5, the Grantee may irrevocably elect, not later than December 31 that precedes the calendar year in which the Award is granted and on such form and in such manner as may be prescribed by the Board from time to time, that the Restricted Stock Units shall be paid on (i) the date such Grantee’s Continuous Service as a Director terminates, (ii) any date elected by the Grantee that is not earlier than January 1 of the second year following the year in which the Award is granted, or (iii) the first to occur of the dates referred to in the foregoing clauses (i) and (ii). In the event of any such election, the payment date timely elected by the Grantee shall be the “Payment Date” with respect to the Restricted Stock Units covered by the election.

7. Termination of Service. In the event of the termination of the Grantee’s Continuous Service as a Director for any reason prior to the lapsing of the restrictions in accordance with Section 4 hereof with respect to any of the Restricted Stock Units granted hereunder, such portion of the Restricted Stock Units held by Grantee shall be automatically forfeited by the Grantee as of the date of termination; provided, however, that if such termination is due to the Grantee’s death or Total Disability, his or her Restricted Stock Units, to the extent then outstanding and unvested, shall be fully vested as of the date of such termination. Neither the Grantee nor any of the Grantee’s successors, heirs, assigns or personal representatives shall have any rights or interests in any Restricted Stock Units that are so forfeited.

8. Corporate Transaction. Notwithstanding any other provision herein, in the event of a Corporate Transaction, any Restricted Stock Units that are then outstanding shall become fully vested and may be paid to the Grantee immediately prior to the effectiveness of the Corporate Transaction as provided in Section 13(b) of the Plan.

9. Tax Consequences. Set forth below is a brief summary of certain federal and California tax consequences relating to the Restricted Stock Units under the law in effect as of the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE GRANTEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER FOR MORE INFORMATION ON THE TAX CONSEQUENCES OF THE RESTRICTED STOCK UNITS.

(a) Payment of the Restricted Stock Units. Upon any payment of the Restricted Stock Units (including any additional Restricted Stock Units granted in respect of dividend equivalent rights), the Grantee may incur ordinary federal and California income tax liability at the time of payment. The Grantee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the Fair Market Value of the Shares received in payment of the Restricted Stock Units.

(b) Disposition of Shares. If the Grantee holds the Shares received in payment of the Restricted Stock Units for more than one year, gain realized on disposition of the Shares will be treated as long-term capital gain for federal and California income tax purposes.

By your signature and the signature of the Company’s representative on the Notice of Restricted Stock Unit Grant attached as Part I of this Agreement, you and the Company agree that this Award is granted under and governed by the terms and conditions of the Plan and this Agreement. You acknowledge and agree that you have reviewed the Plan and this Agreement in their entirety, have had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understand all provisions of the Plan and this Agreement. You hereby agree to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions relating to the Plan and this Agreement.

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to

Securities Exchange Act Rules 13a-14(a) and 15d-14(a)

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Carol Bartz, certify that:

1. I have reviewed this Form 10-Q of Yahoo! Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 9, 2010	By:	/s/ CAROL BARTZ
		Carol Bartz
		Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to

Securities Exchange Act Rules 13a-14(a) and 15d-14(a)

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Timothy R. Morse, certify that:

1. I have reviewed this Form 10-Q of Yahoo! Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 9, 2010	By:	/s/ TIMOTHY R. MORSE
		Timothy R. Morse
		Chief Financial Officer

EX-32

Exhibit 32

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Yahoo! (the “Company”) for the quarter ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Carol Bartz, as Chief Executive Officer of the Company, and Timothy R. Morse, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of her or his knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ CAROL BARTZ
Name:	Carol Bartz
Title:	Chief Executive Officer
Dated:	August 9, 2010
	/s/ TIMOTHY R. MORSE
Name:	Timothy R. Morse
Title:	Chief Financial Officer
Dated:	August 9, 2010

The foregoing certification is being furnished pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, regardless of any general incorporation language in such filing.