Steve Ballmer must be itching for a fight. The culture he built at Microsoft prizes confrontation, and taking its bid for Yahoo directly to shareholders would fit his style. And he has hinted that, absent a response from Yahoo's board, he'd launch a proxy fight. But he'd be better off just walking away. Or seeming to. That's the technique Oracle CEO Larry Ellison used on BEA. He walked away when the smaller software company refused his advances. After leaving BEA to twist in the stock market's wind for a while, he returned and found it more pliant. Jerry Yang has frustrated Ballmer by playing hard to get. The move Ballmer might find unsatisfying, but most effective, would be to return the favor for a while.

The security specialists at Microsoft, not satisfied with just how insecure their operating systems have turned out, have unveiled a USB dongle that plugs into a computer, bypasses any Windows passwords or encryption, and quickly downloads sensitive data such as your Web browsing history. This is just some of the latest cybercrime-fighting technology being discussed at a company summit in Redmond for law enforcement officials from around the world. Code-named COFEE, 2,000 of the devices have already been distributed to police officers, and are intended to help collect data from suspects in criminal investigations quickly. Microsoft has been quietly giving back-door key since June. As Slashdot points out, "Just one more reason not to run Windows on your computer."

Yahoo CEO Jerry Yang Yang's wife, Akiko Yamazaki, gave birth to the couple's second daughter this week. BoomTown's Kara Swisher reported the news, citing sources close to the company, and then warned Microsoft CEO Steve Ballmer to "give Yang a break and back off, at least for today." For Yamazaki's sake, we hope Ballmer ignores this advice and takes an upped offer to Yahoo shareholders today, while Yang's too busy in the maternity ward to fend it off. Without a job, Jerry will have no excuse to ignore the 4 a.m. wailing.

Microsoft CEO Steve Ballmer could begin a proxy fight for control over Yahoo's board toward the end of this week. Microsoft's rank and file do not want him to, according to ZDNet's Mary Jo Foley. None would go on record with an opinion contrary to Ballmer, but one anonymous source told Foley:

Former Yahoo executive Jeff Bonforte, now CEO of Xobni, has come up with possibly the most cynical yet useful product ever launched by a startup. Xobni, whose software tracks and analyzes email usage in Outlook, is rumored to be in acquisition talks with Microsoft. Microsoft is, to its dismay, not in acquisition talks with Yahoo. But Xobni's latest product, TechCrunch's Erick Schonfeld reports, bridges Microsoft Outlook, desktop email software widely used in corporations, with Yahoo's Web-based email. "That's the kind of demo that gets deals done," Schonfeld observes. Indeed, it may make Microsoft wonder whether they need to buy Yahoo at all.

Wondering what a Microsoft takeover will mean for the Yahoos? Front-page editors at the San Jose Mercury News offer what one hopes will be the last word.

Engineer Mark Hamburg has left Adobe for Microsoft. Known as the "architect" of Adobe, Hamburg is credited by the Photoshop Hall of Fame with "programmer logic and the compositing models that unite Photoshop's imaging effects to specific features such as the history palette, free transform, screen caching, and shapes." Hamburg will move to Seattle and focus on "user experience." [LightroomNews]

CNBC David Farber reports that Microsoft will move to getting a new, takeover-friendly Yahoo board elected later this week through a move known as a "proxy fight." How have Yahoo CEO Jerry Yang and the Yahoo board responded to the news? A Microsoft advisor tells Farber: "They're still smoking dope." Seriously, though, Jerry, have you ever tried succumbing to a hostile takeover on weed?

Ning founder Marc Andreessen is already on the record about Microsoft's proposed takeover of Yahoo: He thinks it will likely go through, and turn out to be a good deal. It's a remarkably sanguine take for someone who saw Netscape bought and destroyed by AOL. In a thorough analysis for which he dragooned two corporate lawyers, Andreessen elaborates: Yahoo has few defenses, aside from a poison pill, and Microsoft will likely succeed. For all its thoroughness, the analysis is less interesting for what it says about Microsoft-Yahoo than for what it says about Andreessen.

Saturday's deadline for Yahoo to respond to Microsoft's takeover overtures has come and gone. On April 5, Microsoft CEO Steve Ballmer promised Yahoo CEO Jerry Yang that if that happened, Microsoft would "take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo board." Which is exactly the kind of action we need around here. So when can we expect the scrum to start? Microsoft executives hope not soon — or ever.

A source close to Yahoo, closer yet to its Media Group, tells us that the emotional strain of February's layoffs, and more expected to come if the Microsoft deal goes through, has Yahoos in the grip of fear. "The big push inside of Yahoo right now is for everyone to justify what they're doing for a living," our source tells us.

In deals like the potential Yahoo-Microsoft merger, "speed is of the essence," Microsoft CFO Chris Liddell said during yesterday's earnings call. But since Microsoft offered to buy Yahoo in February, this one "has been anything but speedy." Microsoft's options, Liddell told analysts on the line, are to bring the "offter to Yahoo's shareholders," "withdraw our offer," or "consider other investments." Liddel said raising its bid is not such an option:

Microsoft's earnings in a nutshell: Sales of Vista were down quite a bit, while Office was slightly up. But Microsoft's also-ran online properties, the root of Steve Ballmer's Yahoo obsession, continued to flounder. Sales grew 40 percent, but its loss widened to $228 million. The more Microsoft spends on the Web, the more it loses. [WSJ]

Nicholas Negroponte, the nutty MIT professor who has championed the idea of cheap laptops for Third World children, is feuding with his own programmers. Negroponte's One Laptop Per Child is best known for its distinctive hardware — the candy-colored, devil-horn-antennaed XO notebook computer. But he's turned his attention to Sugar, the Linux-based software which runs on the XO. Negroponte, cozying up to Microsoft, wants Sugar to be rewritten for Windows. Great idea, says OLPC developer C. Scott Ananian — hire 10 Windows developers right away, suspend all other software development, and maybe it will happen.

Yahoo CEO Jerry Yang's delay tactics may be working. Microsoft employees are more opposed to merging with Yahoo now than they were when CEO Steve Ballmer first made his offer in February. Some of these wary employees are leaving Microsoft, "rank-and-file workers and executives" told the Wall Street Journal.

First Microsoft CEO Steve Ballmer wielded the stick — promising two and half weeks ago that if Yahoo's board failed to begin merger negotiations by this Saturday, he would take his $31 per share offer to buy Yahoo straight to its shareholders. Now comes the carrot. Ballmer has let sources make it known that he's likely to increase his offer if Yang and the board will agree to begin formal discussions, reports the New York Post. (Photo by DBegley)

Yahoo CEO Jerry Yang said once again during yesterday 's conference call with analysts that "Microsoft's proposal substantially undervalues Yahoo." According to Microsoft CEO Steve Ballmer, however, that judgment isn't up to Yang anymore. Two and half weeks ago, Ballmer and Microsoft set a deadline for Yahoo to begin negotiations before this Saturday or face a proxy fight. Speaking yesterday in Milan, Ballmer sounded ready to take his chances with Yahoo shareholders. "We are offering a lot of money," he told the crowd. "If Yahoo's shareholders like it, that's great. We are prepared to go forward without a merger with Yahoo."

Yahoo beat analyst expectations for its first-quarter revenues by $30 million, $1.35 billion to $1.32 billion. Its net income, at $542 million, was considerably higher than Wall Street had hoped for, too. But $401 million of that profit came from a noncash gain, Yahoo's take from Alibaba.com's initial public offering, from which Yahoo profited because it owns 39 percent of Alibaba Group, Alibaba.com's parent company. Investors have taken this caveat into account, bidding Yahoo's stock slightly down in after-hours trading. Commenter WagCurious wants to tar and feather Yahoo CFO Blake Jorgensen for including these gains in Yahoo's quarterly revenues. But one-time gains like this are a well-understood phenomenon, and there's nothing unusual about Yahoo's treatment of it. If nothing else, Wall Street understands making money from buying and selling pieces of companies.

A tipster writes to confirm our hunch that Yahoo is putting the squeeze on expenses: