Yahoo!'s (Nasdaq: YHOO) first-quarter report was neither the treasure trove investors craved, nor the minefield they feared.

Revenue before traffic acquisition costs climbed 14% to $1.35 billion, but that was no surprise. Yahoo! had snapped up several small online advertising firms over the past year.

The numbers don't get too encouraging from there:

  • Free cash flow would have fallen, if not for a one-time $350 million payment from AT&T (NYSE: T).
  • Operating income also dropped.
  • Adjusted earnings fell from $154 million to $150 million.
  • Display advertising gains helped power a 19% top-line surge domestically, but Yahoo! suffered an 11% dip in international revenue. That's a problem, since operating margins are much higher internationally for Yahoo! than in its domestic efforts.
  • Revenue from affiliated sites -- the equivalent of Google's (Nasdaq: GOOG) growing AdSense network of third-party publishers -- has fallen for several quarters now.

The company's near-term guidance calls for more of the same. Second-quarter gross revenue is projected to climb by 2% to 14% over last year, but operating profits will likely fall sharply.

Memo to Steve Ballmer:
Are you sure you still want this on your hands, Microsoft (Nasdaq: MSFT)? If the software giant thought it was getting boosts in international markets and affiliate-site network exposure, Yahoo! seems to be fading on both fronts.

Yahoo! isn't a worthless dud. Its display advertising business is a gem, posting impressive 25% year-over-year growth after its recent shopping spree. Still, that's not as attractive as Google's paid-search stronghold, where the high click rates, deep sponsor inventory, and targeted positioning advantages shine.

Why else would Yahoo!'s report show just roughly 35% of the revenue and less than 10% of the profit of Google's blowout quarter last week, despite supposedly serving up more page views as the Web's most trafficked site?

In its favor, Yahoo! also has attractive investments in Yahoo! Japan, Gmarket (Nasdaq: GMKT), and Alibaba.com, worth a collective $13.8 billion (or nearly $10 a share). And that's before considering the value of Alibaba's sister companies, which have yet to go public.

Unfortunately for Microsoft, both Alibaba and the Chinese government may get in the way of that handoff, turning a juicy asset into a taxable payday.

In sum, Yahoo! isn't any more attractive today than when it was trading in the high teens as a stand-alone company three months ago. There is certainly no reason for Microsoft to raise its bid, or even keep it on the table, after this weekend.

Memo to Jerry Yang:
You don't need to do this, Yahoo!. There's not enough desperation within the model to force an exit strategy. Yahoo! still has $2.8 billion in cash and marketable securities, it's consistently profitable, and its display advertising mastery is strengthening, despite the weakness in its affiliate network.

Along with the margin-propping boost that Yahoo! could score if it continues to outsource its paid-search business to Google, it may very well earn today's deal-inflated price -- and more -- in a few years.

Unfortunately, investors aren't always patient. They've been burned by Yahoo! before. They know that the moment Microsoft pulls its offer from the table -- as it promised it would by Saturday -- will be the point of no return. Microsoft will be too proud to not reduce its offer. Yahoo! will be too proud to accept it.

Either side is waiting for the other to flinch, but in reality, Microsoft would be setting a terrible precedent for future acquisitions if it upped an already generous offer after a yawn-worthy quarter. Its best bet at this point may be to scratch Yahoo! from its book, and pursue cheaper display-advertising players like ValueClick (Nasdaq: VCLK) or content-driven deals from suitor-hungry companies like MySpace or Time Warner's (NYSE: TWX) AOL.

This quarter was supposed to be huge. It was supposed to set the stage for Microsoft to raise its bid or cut its losses. In the end, it's too ho-hum to matter, which is telling; you'd think that Yahoo! would pull out all the stops to deliver a blowout quarter like Google did last week.

Let's admit that Microhoo is a mistake. Microsoft and Yahoo! have too many overlapping holes in their fruitless quest to vanquish Google. They definitely need better plans to shake off the ever-more-putrid stench of irrelevancy, and they won't find a solution by teaming up.

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Longtime Fool contributor Rick Munarriz is a fan of Yahoo! and Microsoft, but not of bad weddings. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.