Think about it:

- Last week, the two companies meet to have unofficial talks with no pre-conditions.

- MSFT pitches vision of the merged entities, maintains that initial half-stock and half-cash $31/share offer is fair and full.

- YHOO talks up AOL, News Corp., private equity opportunities.

- MSFT reminds YHOO that News Corp. passed, AOL bought Bebo and PE won’t have the credit stomach to muster up an offer.

This is where two different options enter the picture:

OPTION 1: YHOO accepts the inevitable, it will sell to MSFT.

- YHOO asks MSFT to sweeten the offer.

- MSFT says it would consider offering an all-cash deal to get the price back to $31 / share, but would need to see YHOO’s Q1 guidance, first.

- YHOO says deal was always $31 for it to even be considered, wants more.

- MSFT says: “our shareholders are already pissed, we need to confirm guidance for 2008 and affirm bullish forecasts for 2008 and 2009″ and maybe, depending on market reaction, we’ll boost it by a $1 or 2.  But not more.

- YHOO comes out today with this report.  We were not impressed.

OPTION 2: YHOO continues to believe it can dodge the Redmond-Express

- YHOO says that it is being undervalued and in a few short years, it can be worth more, far more.

- MSFT says “prove it, we doubt it”.

- YHOO - realizing its options for AOL, News Corp. and PE are no-go’s - takes out the “independence card” and issues today’s report touting its rosy future.

I am not sure which option is the more accurate representation of those talks, but everything Jerry Yang has done has shown to be emotional and a refusal to accept that MSFT’s acquisition is an inevitability.