Yahoo and Microsoft are poised to finally sign the definitive agreement that will govern the complex and far-reaching search and online advertising partnership they struck in late July, said sources close to the situation.

If all goes well, the various Microsoft and Yahoo execs–who have been ferreted away over the last weeks, busy dotting all the i’s and crossing all the t’s in the massive document–could even turn in their deal homework to their bosses for signature by the end of the week.

Yahoo (YHOO) officials declined to comment, while Microsoft (MSFT) has not gotten back to BoomTown as yet.

In any case, getting the definitive agreement in place is critical to making the high-profile MicroHoo deal a reality and, of course, getting the anti-Google (GOOG) party started.

So when the pair blew through a deadline to complete it in late October, there were eyebrows raised all over Wall Street and Silicon Valley.

When Yahoo filed an 8-K with the Securities and Exchange Commission in August, it noted that the “Definitive Agreement” between the Silicon Valley Internet company and the Redmond, Wash., software giant needs to be sketched out by Oct. 27, 2009.

But it is a monster document, which is why MicroHoo did not complete it in time. After that whiff, Yahoo said as much in another filing with the SEC:

“The Letter Agreement specified that the parties would execute definitive agreements by October 27, 2009, but given the complex nature of the transaction, there remain some details to be finalized.”

Added Microsoft similarly:

“We have made good progress in finalizing the definitive agreements. Given the complex nature of this transaction there remain some issues that need some additional clarity and definitive details.”

Nonetheless, both companies have consistently said that they would be able to close this deal by early 2010.

Yahoo and Microsoft had already done a pretty hefty binding-agreement letter (here is a picture of Yahoo’s CEO Carol Bartz and Microsoft CEO Steve Ballmer holding it, in fact).

Also key: Getting approval for the deal from regulators in Washington, D.C., which, sources said, also seems to be on track.

With little opposition, Yahoo and Microsoft policy types have been chipping away on regulatory issues with federal regulators in Washington.

And, several sources said, those government approvals are now nearing completion at the Justice Department, even though the Federal Trade Commission might still ask for more assurances on privacy issues related to online advertising and consumer data.

International regulatory approval is another story, especially in Europe, which could further delay the implementation of the partnership, since it is unlikely the pair would move forward without clearance globally.

When that is done, the real game begins, as MicroHoo faces its the much more critical Tim Gunn acid test for the deal:

Making it work.

Unlike the gripping back and forth of the fight over Yahoogle last year, the approval process for the search and online advertising partnership of Microsoft and Yahoo is chugging along slowly but surely as the Justice Department has deepened its investigation by reaching out to a broad range of publishers, advertisers, public interest groups and rivals for comment recently.

A month ago, the government agency lobbed in a “second request” for information about the deal the pair struck earlier this summer.

This kind of regulatory review is typical in deals of this magnitude.

But so far, there is no significant external challenge to the MicroHoo deal, even–according to many sources BoomTown has interviewed over the last week–from Google, the likeliest company to try to scuttle or, at the very least, slow down the deal.

“Is it worth fighting a big fight over?” asked one person close to the thinking of Google (GOOG). “Not really.”

Said another source, surveying the state of play: “It’s eh, kind of inevitable and not that interesting on a lot of levels.”

While none of the key constituencies wanted to comment or make predictions about the outcome of the regulatory scrutiny, most seem to agree that MicroHoo is more likely to be approved than not.

At the time the partnership was announced in July, execs at both Microsoft (MSFT) and Yahoo (YHOO) said a lot of investigation was likely from Justice, although they said they were also confident that it would be allowed go through by year’s end.

So far, several sources said, the key issue raised by the Justice Department has been whether the argument Microsoft and Yahoo are making–that they need scale to compete with Google–is valid or not.

Currently, Google has just under 70 percent of the search market in the U.S., while Microsoft and Yahoo together have about 28 percent.

Google has been arguing that huge scale is not necessary to be successful in the search ad market, although its execs have often said bigger is better when it comes to natural search and in spurring more clicks on ads.

Meanwhile, Microsoft and Yahoo have said they need all the firepower they can muster together to battle Google’s hegemony.

In a related concern, some regulators are worried–as they were when Google and Yahoo were trying to get approval for a similar deal last year–that any hookup of big players in the market will effectively take Yahoo out of the search business.

“With only three big players, going to two is not desirable to the government,” said one source. “Yahoo has to reassure everyone that it is focused on a sustainable business model beyond search.”

In a blog post yesterday, in fact, Yahoo said it was committed to search innovation.

In any case, most expect another month of investigation at least, although the lack of any loud voice in opposition could shorten that time frame.

And, added some sources, unlike with Yahoogle, there is not likely to be any kind of Congressional hearing on the deal.

Nonetheless, Microsoft, Yahoo and Google remain concerned that deals like this will lead to more focus on privacy issues, specifically around behavioral targeting.

That would be more a matter for legislators or the Federal Trade Commission and would probably come well after the deal is cleared and as part of a bigger topic.

Rep. Rick Boucher (D., Va.), who chairs the Subcommittee on Communications, Technology and the Internet, said he will consider consumer privacy legislation this fall.

Boucher led hearings on the subject this summer, and there might be more, especially as Web companies garner a lot of personal information from consumers with little oversight of what they do with those data.

If Boucher does call for hearings, he might want to replay this particularly boneheaded (but funny!) video from Yahoo’s U.K. ad staff, which classifies various Yahoo customer types–such as “disco-dancing heart surgeons from Nantwich”–as farm animals:

Please see this disclosure related to me and Google.

Here’s a video interview I did while at the Monaco Media Forum with Facebook’s Chief Revenue Officer Owen Van Natta about the new ad product from the hot social network–dubbed “social advertising”– that has everyone’s knickers in a knot.

Excuse that metaphor, but I am traveling in England, so it seemed exactly the right one to describe the horror that many have expressed that ever more targeted advertising is going on on the Internet.

Imagine that!

In any case, listen to Van Natta–the longtime and often unsung Facebook exec who struck the sweet deal with Microsoft and is the one most charged with making it so with that pretty explicit chief revenue officer title of his.

Of course, the controversy that has mounted in the United States after Facebook unveiled its efforts last week to use its vaunted “social graph” to tout new ad initiatives that would target users’ behavior and leverage their friends comes as no surprise.

Pretty much every hot online service that has come down the pike–from AOL to Google–has gotten sucked up into this debate, even as more ads have become more targeted and scrutiny of online consumers has grown exponentially.

Facebook’s giant faux pas? Founder Mark Zuckerberg had the cheeky nerve to actually brag about it all at the ad event in New York when his nefarious plot was unveiled.

“Nothing influences a person more than a recommendation from a trusted friend,” Zuckerberg said when he introed the ad scheme. (He also rather cloddishly noted: “The next hundred years will be different for advertising, and it starts today.”)

Well, he kind of had to say it all, didn’t he, especially with MySpace announcing a me-too ad program the day before and with Google slapping him silly with a PR-fueled attack the week before with its the-jury-is-still-out OpenSocial initiative?

Most of all, of course, Zuckerberg had to with the still-fresh $15 billion valuation of Facebook from its $240 million investment deal with Microsoft screaming for justification: There has to be a real business model in here!!

Of course, some of the press and a whole lot of privacy groups have been calling foul about the plan, even though it is just not the biggest leap ever taken related to personal data being used to target consumers by advertisers.

For years now, a range of contextual and behavorial data has been sucked out of online services and used to better aim ads right back at them. Facebook and MySpace are, of course, crossing yet another line, by more explicitly linking data you input into the mix.

That includes the possibility that they could broadcast your purchases to your friends, which some claim is illegal and requires written consent, because apparently you become some sort of unpaid celebrity shill by doing so.

I very much doubt that–all you might become is a pretty irksome friend hawking your deep affinity with, say, Krispy Kreme donuts. (Hey, this picture is an unpaid endorsement, but: Kara says you should eat them constantly until you go into a diabetic coma!!)

That has not stopped the noisy protests, of course. Just yesterday, two more consumer groups asked the federal government–specifically the typically ineffective Federal Trade Commission–to look into the new ad plans by both Facebook and MySpace, calling their efforts a violation of privacy.

“MySpace and Facebook are like the digital-data equivalent of Fort Knox for Madison Avenue marketers,” wrote Jeffrey Chester, executive director of the Center for Digital Democracy in a letter to the FTC. “It is a kind of one-stop data shop for marketers.”

Nice metaphor by Chester, but let’s remember we don’t really rely on that gold locked away anymore to bolster our currency, and the treasure of social-networking data might prove to be just as useless.

In fact, I am more concerned that these ad plans turn out to be underwhelming, proving Facebook and all sorts of social-networking businesses are more fun than, well, actual profit-spewing businesses.

I think the bigger question to ask: What if it doesn’t work so well?

Sorry for being so jaded, but the tracking of online activities is something that will only get more and more customizable over time and is hard to argue with if users choose to share that information directly or via becoming a “fan” of a product.

Like I said: Profoundly annoying, potentially goofy, possibly inane, all a resounding yes! But illegal? Um, no.

Or, as Zuckerberg also said at the ad rollout in New York last week, Facebook is–well, he hopes anyway–an “ad-supported business.”

Oh, that.