Microsoft CEO Steve Ballmer and Yahoo CEO Jerry Yang met last weekend over a round of golf, a setting the two hoped would be more casual and productive than previous meetings. Later, Yang said that it was clear that Microsoft was no longer interested in merging the two companies and was instead trying to negotiate a less sweeping arrangement.

"Microsoft is no longer interested in buying the company, and we are talking about other things," Yang said. "We definitely have to understand what they're proposing. They clearly have an interest in Yahoo, and we need to understand more."

Ballmer confirmed this information, but suggested that things could change. "We are not rebidding for the company," he said. "But we reserve the right to do so." Meanwhile, Microsoft chief software architect Ray Ozzie said separately this week that buying Yahoo was "not a strategy onto itself." "Yahoo is an accelerator," he said. "We'd love to still discuss possibilities with Yahoo."

Sources close to the negotiations say that Microsoft is interested in purchasing Yahoo's search business and then taking a minority interest in what remains of Yahoo. Adding to the drama, Yahoo has discussed farming out part of its search business with Google and billionaire investor Carl Icahn has threatened a shareholder revolt if the company doesn't jumpstart talks with Microsoft.