Yahoo! (YHOO)

Stock Option, Restricted Stock and Restricted Stock Unit Grants.

        As noted above, the Company has in the past relied substantially on long-term equity-based compensation as an important means of compensating and motivating its executive officers. It is the Company's practice to set option exercise prices for executive officers at not less than 100% of the fair market value of the common stock on the date of grant. Thus, the value of the stockholders' investment in the Company must appreciate before an optionee receives any financial benefit from the option. Options have historically been granted for a maximum term of ten years. The Company's amended stock plan, approved by the stockholders at the May 19, 2005 annual meeting, reduced the term of all options granted after such date to seven years. The Company generally makes annual grants of options to a large number of its employees, including its executive officers, in December of each year after conducting its annual compensation review process. In December 2005, the Company also began making grants of restricted stock units to its employees as part of its annual review process.

        In determining the number of shares subject to grants of stock options, restricted stock and restricted stock units to executive officers, the Compensation Committee considers various subjective factors primarily relating to the responsibilities of the individual officer and the officer's expected future contributions. The Compensation Committee also considers the officer's historic total compensation, including prior equity grants and exercise history, as well as the number and value of shares owned by the officer or which continue to be subject to vesting under outstanding equity grants previously made to such officer. The Committee considers, with the assistance of its Independent Consultant, the value of the stock options, restricted stock and restricted stock units proposed to be granted to an individual officer using the

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Black-Scholes methodology. In addition, the Compensation Committee examines the quantity and type of equity incentives held by each executive officer relative to the other executive officers' equity positions and their tenure, responsibilities, experience and value to the Company.

        As part of the annual compensation review for performance in 2005, the Compensation Committee in December 2005 granted the Named Executive Officers of the Company (other than Mr. Semel, whose equity incentive awards for 2005 are described below) options which have a term of seven years. The options vest over a period of four years, 25% after one year, and then ratably thereafter over a period of three additional years in equal semi-annual installments.

        Also as part of its annual compensation review for performance in 2005, the Compensation Committee in December 2005 granted restricted stock units. Each unit represents the right to receive one share of the Company's common stock, subject to satisfaction of vesting conditions. The Compensation Committee granted restricted stock units in respect of 50,000 shares of the Company's common stock each to three of the Company's Named Executive Officers, Ms. Decker, Mr. Rosensweig and Mr. Nazem. These restricted stock units vest with respect to 15,000 units upon the satisfaction of certain performance-based objectives, but in no event prior to the first anniversary of the date of grant, and with respect to the remaining 35,000 units on the third anniversary of the date of grant. The performance criteria include the Company meeting specified operating cash flow and revenue targets.

        As reported in last year's report, to enhance the retention incentives for certain executives of the Company into 2009, the Compensation Committee in February 2005 granted additional options and shares of restricted stock to such executives, including the Named Executive Officers. To provide a substantial retention incentive, these retention options (other than the options granted to Mr. Semel which are described below) vest with regard to one third of the covered shares on the third anniversary of the grant date and with regard to the remaining two thirds of the covered shares on the fourth anniversary of the grant date. The restricted shares vest in full on the third anniversary of the grant date. The restricted shares are subject to accelerated vesting in the event of death on a pro rata basis. In deciding to make these 2005 retention incentive grants, the Compensation Committee considered, among other things, the performance of the executives, the importance of their retention to the Company, prior equity awards, prior option exercise history, and the vesting dates of the recipients' other outstanding equity grants.

        Over the summer of 2005, the Committee reviewed Ms. Decker's overall performance, value to the Company, employment terms, retention and expectations. In particular, the Committee noted that Ms. Decker has assumed a significant role in determining the strategic direction of the Company over the course of her almost five years of employment with the Company. Based on this review and consultation with the full Board of Directors, in September 2005, the Committee provided that if Ms. Decker remained with the Company through March 31, 2006, the vesting of 893,750 of her stock options and 105,000 shares of her restricted stock would accelerate and become fully vested on such date. In addition, the Committee extended the post termination exercise period of 950,000 and 1,000,000 of Ms. Decker's options to three years and four years, respectively, after any termination. Approximately 90% of the options subject to the extended exercise periods had exercise prices above the then current fair market value of the stock.