DEAR SHAREHOLDERS,
I joined Yahoo! in January because I was energized by the Company’s formidable assets and vast potential. Yahoo! had been through an unprecedented year marked by Microsoft’s various proposals, a proxy contest, the consideration of several strategic alternatives, and a worsening economy. It would be easy to assume that the Company had been focused solely on these issues at the expense of the business.

But what I’ve learned since I first rolled up my sleeves here is just the opposite: the innovation engine is strong; the product pipeline is full; and there’s an intense focus on delivering the best products and services for our users and deepening our relationships with partners and advertisers.

Without question, there were important issues to address when I arrived. I found an overly complex organization and a strategy that required greater clarity. Decision-making needed to happen faster, accountability had to be clearer, and we needed to concentrate even more intently on our customers— both users and advertisers.

My first task was to simplify our organization, priming us to make big improvements in product quality and operational efficiency while also better supporting our customers. This started in February with streamlining the senior leadership team and creating new positions focused on customer advocacy, marketing and international operations. We will continue to simplify Yahoo! throughout the year.

Like other companies, we face a tough external environment, but the good news is this: our business model doesn’t require fundamental changes. Users love our products, and we are one of the “go-to” places for advertisers online.

Despite the challenges Yahoo! has faced, our users are engaged—more than 500 million rely on Yahoo! each month for critical information and services—and user engagement continues to grow. Advertisers want to connect with those users, and I believe the financial opportunity is significant. To capitalize on this opportunity, we must rapidly evolve our user products and advertiser services to be best in class and make it easier for advertisers to buy from us, both on and off the Yahoo! network.

This will be our focus going forward. Users and advertisers create a virtuous circle— the more satisfied they are, the more engagement and monetization will flow.

We must work harder and smarter to maximize long-term revenue and profitability. My job is to ensure we’re capitalizing on our highest return assets and increasing our share of the advertising pie, so we’re even better positioned to deliver shareholder value now and when the economy improves.

FINANCIAL RESULTS
In 2008, Yahoo! performed well in an incredibly difficult environment. Despite extraordinary company-specific events and the beginning of a worldwide recession, the Company delivered revenues of $7.2 billion.

Revenues in both our core owned and operated (O&O) advertising businesses grew, with O&O search up 17% and O&O display up 7%. While the rapid changes in the macroeconomic climate slowed growth beginning in the back half of 2008, I believe our core businesses are poised for success as the economy recovers.

When the going gets tough, companies must concentrate on what they can control, and the Company’s focus on streamlining operations and managing costs intensified during 2008.

Difficult decisions were necessary, including reducing headcount by approximately 10% late in the year. The result was profitability in line with our 2008 outlook. Looking forward, I will be emphasizing accountability for results and even greater cost efficiency, particularly given the economic environment. At the same time, I will not sacrifice investment in the significant opportunities ahead of us.

In 2008, we generated cash flow from operating activities of $1.9 billion and free cash flow of $1.3 billion, including a $350 million one time up-front payment from AT&T. With uncertainties in the credit market, we were very focused on managing our cash conservatively so our balance sheet remained strong, giving us plenty of flexibility.

Our cash and marketable securities balance at the end of 2008 stood at $3.5 billion, up from $2.4 billion at the end of 2007. This does not include the value of our direct and indirect interests in publicly traded securities, such as Yahoo! Japan, Alibaba.com in China, and Gmarket in Korea, which collectively amounted to $9.4 billion at year-end. In April 2009, we announced an agreement to sell our 10% interest in Gmarket to eBay.

2008 ACHIEVEMENTS & MILESTONES
Improving Yahoo! for Users: Despite the conditions the Company faced in 2008, Yahoo!’s compelling products continued to attract millions of engaged users: page views of Yahoo! properties grew 19% in 2008 over 2007.

Yahoo!’s homepage remains a key starting point on the Internet for hundreds of millions of users, and we’re working hard to make it more open, social, and relevant. We began testing a new homepage design, which will allow Yahoo! and our users to do even more to personalize experiences. We also initiated new content optimization capabilities and launched Yahoo! Buzz, which allows users to vote on and “buzz up” their favorite stories.

Yahoo! Search introduced innovative features and capabilities at a much faster pace over the last year, rolling out enhancements like Search Assist, to give users suggestions as they search, as well as SearchMonkey, to give website owners control over how their sites appear in search results. This improved rate of innovation drove results, and query growth was strong in 2008.

I believe Yahoo! Search is a very valuable part of our business; it’s beneficial to our franchise to deeply understand what users are looking for when they are online. We have some of the biggest brains in the business working hard to make search results more compelling and get users to what they want with fewer clicks.

The next generation of Yahoo! Mail also took shape in 2008, bringing together email, instant messaging and mobile text messaging. We’re adding and testing new Mail features including a “smarter inbox,” allowing users to filter and prioritize messages from personal connections.

We’re also improving functionality and usability, and there’s much more to come. We successfully deployed several mobile innovations last year as well, including the new version of our award-winning Yahoo! oneSearch product, which now features voice-enabled search. With the announcement and launch of Yahoo! Mobile, a mobile starting point to the Internet that is now available on hundreds of devices via the mobile Web, we are doing even more to help people discover, stay connected and stay informed. We see tremendous growth opportunities in mobile in the years ahead.

User engagement in all of these key properties reflects how committed we are to delivering great experiences. In fact, I believe this is one of the major reasons Yahoo!’s brand remains so strong despite the challenges the Company has faced. Yes, there is much more we can and will do to add more “wow” to our products, but it’s important to remember how much our users already love what Yahoo! brings them today.

Becoming More Valuable to Advertisers and Publishers: The common theme in my conversations with major advertisers and agencies since my arrival is that they view Yahoo! as a leader in online advertising. They highly value our creativity and technical expertise in bringing real solutions to their marketing challenges. What they want most, though, is an easier way to buy and measure online advertising—especially display advertising.

To that end, in 2008 we introduced APT from Yahoo!, a display advertising platform designed to simplify the process of buying and selling online ads. APT from Yahoo! is an integrated web-based solution designed to bring publishers, advertisers, networks and agencies together, and ultimately allow advertisers to better target audiences not just on Yahoo! but across the Web and allow publishers to better monetize their content.

More than 130 of our newspaper partners are up and running on the platform, and we’ll continue to roll out APT from Yahoo! over the coming year.

On the search side, Yahoo!’s Panama search marketing system has been deployed globally, and in 2008 we enhanced our geo-targeting capabilities in the U.S. and introduced a number of features to improve monetization. The overarching goal of Panama is to increase the relevance of search advertisements to users, and our progress there helped us continue to grow revenue per search in the U.S. throughout 2008.

With advertisers cutting budgets and seeking greater efficiency and measurability in this tough climate, we must do even more to provide them easy-to-use solutions and a clearer understanding of campaign performance.

While ad spending remains under pressure, we believe our ability to deliver better returns on marketing dollars helped to drive growth with several large advertisers in the latter part of 2008. We will continue to develop products, features and sales plans to grow our share of the advertising pie over time, which should put Yahoo! in a stronger position when ad budgets begin to grow again.

Rolling Out Powerful Platforms: Underlying all of Yahoo!’s products must be cutting-edge technology, which we are making more efficient internally and more accessible to outside developers by fundamentally rewiring Yahoo!. Over the last year, the Company has begun the shift from historically decentralized product silos to creating a global product infrastructure. We will continue to invest to unify platforms, processes and code to allow us to be more streamlined, efficient and effective, and to innovate more rapidly.

In 2008, we launched the Yahoo! Open Strategy (Y!OS), a set of complementary developer platforms designed to better open Yahoo! to third-party developers and publishers. We’ve invited developers to take advantage of our huge scale by writing applications that build on our popular properties, tap into millions of loyal users, and make users’ Internet experiences more relevant and useful.

We also opened up our search infrastructure and technology to developers with BOSS (Build your Own Search Service), which allows developers to create custom search experiences on their own sites. By improving search across the Web, we’re fostering innovation and creating new monetization opportunities. Look for more tangible results in 2009 and beyond as we make our products more open and social.

LOOKING AHEAD
We have a lot of strengths at Yahoo!—loyal users, marquee advertisers, great technology, superb employees, a valuable brand, and a strong balance sheet. And now that our organization is poised to be faster on its feet, you can look for us to better capitalize on those strengths.

We will focus on better understanding our customers’ business, exercising careful cost discipline, and executing against our business model. I haven’t been here long enough to make you a more specific list of promises but I can tell you that I believe the foundation of our success will be built by a relentless focus on great products and customer service—plain and simple.

We might have a tough year ahead of us given current economic conditions, but I didn’t take this job because it was easy; I’m here because I saw a great opportunity to create long-term shareholder value. What I’ve seen in my first few months here only strengthens my belief in that potential.

Throughout the good times and bad, Yahoo! has been fortunate to work with great people: customers, partners, developers, employees, and, of course, you. I know it’s been a difficult ride for our shareholders in recent years, and we appreciate your continued faith and support. While the challenges we face can’t be minimized, opportunity is still knocking loudly.

I look forward to delivering on Yahoo!’s tremendous promise in the coming years.
Carol Bartz
Chief Executive Officer

Visit Yahoo! 2008 Annual Report Download Page

Read Yahoo! Annual Report 2008 online, or you can download Yahoo! Annual Report 2008 in PDF format.

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