In early discussions that began in the last several weeks that apparently included a face-to-face meeting last week, Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer are finally talking about search and also advertising partnerships the companies could possibly strike, said several sources with knowledge of the situation.

According to a variety of sources, the talks between the pair (pictured here) and other execs at both companies are preliminary and wide-ranging, focused on what kind of commercial relationship Yahoo and Microsoft could have in the future.

But, cautioned sources close to Yahoo, the discussions are not about a renewed acquisition attempt by Microsoft and also might not result in any deal.

In any case, investors will likely cheer any kind of productive re-engagement between Yahoo (YHOO) and Microsoft (MSFT), which has been lacking since a tense takeover effort by the software giant went south last year after an ugly battle that soured relations between the two companies.

“It’s long past time,” said one outsider who had been told of the discussions. “With Google’s huge market share, these two need to work together and the problems they had should be put in the past.”

Both Yahoo and Microsoft declined to comment about the talks.

The change in leadership at Yahoo has helped, especially since Bartz–a Silicon Valley veteran with much deal experience–has none of the baggage from the takeover battle that previous management was carrying.

Microsoft seems to have also moved on, working on a massive redesign and relaunch of its search brand, under the internal name Kumo, an effort that has included the hiring a whole lot of talent in the arena, mainly from Yahoo, in fact.

That includes Qi Lu, a former Yahoo tech star, who is leading all of Microsoft’s online efforts.

All of this means that a relatively green-field approach is now possible.

Thus, sources said, the talks include many scenarios, such as one in which the companies swap online advertising assets and deliver services to each other.

In that interesting plan, Yahoo might take over all of Microsoft’s display and premium advertising business to sell along with its own, while Microsoft would run the search advertising business for the pair.

Such a deal, which plays to each company’s strengths, would bind the two closely together, even though they still compete on many other fronts in the Internet space.

It also joins their forces, creating a sale that is much more attractive to advertisers and allows for better competition against search powerhouse Google (GOOG).

And while Ballmer has publicly said repeatedly that Microsoft is interested in buying either Yahoo’s search advertising business or search outright, sources close to Yahoo said the company is still determined to maintain control of the important search business and the massive traffic and critical data it provides.

That is especially true, given that Yahoo is the No. 2 player, with a much larger share than third-place Microsoft. According to recent surveys, for example, Google has a 63 percent share, while Yahoo has 20.6 percent and Microsoft eight percent.

But it is also in Yahoo’s interest to move fast, since its search traffic could be declining soon.

According to a story by Dow Jones yesterday, citing a comScore (SCOR) report, recent toolbar distribution deals with computer makers Hewlett-Packard (HPQ) and Acer by Microsoft and Google respectively, will have a negative impact on Yahoo.

The story said that Yahoo “could lose up to 15% of its search traffic over the next 12-to-18 months after failing to renew deals with two computer makers, blows likely to hamper the Internet giant’s efforts to remain a viable competitor in search advertising.”

But even as he directs aggressive moves to put even more competitive pressure on Yahoo, Ballmer has been unusually deferential in giving Bartz a lot of time to come to the table.

Nonetheless, he cannot seem to stop talking about it either.

At a recent conference in mid-March, for example, Ballmer said:

“It’s really about getting the pooled volume, because you actually can improve your product faster if you have more users….If you have more advertisers, you can improve the product as well….There are returns to scale. And putting the scale together is valuable.”

But, in that interview, Ballmer also said that he had only talked to Bartz briefly since she was hired in January–congratulating her on the new job and mentioning that he’d love to talk about a deal.

And, at another meeting with Wall Street analysts earlier, he went even further:

“You all know that I would like to figure out how to pool somehow Microsoft and Yahoo. I’m not talking about doing an acquisition, blah, blah, blah, back to search deals, blah, blah, blah, I don’t know if anything is going to happen. I’ll short-circuit the whole conversation, but the fact of the matter is, these two guys [Microsoft and Yahoo] should somehow figure out how to get together and create more competition for this guy [Google]. And I’m hoping perhaps that that’s a reasonable conversation to have with new management at Yahoo as Carol comes onboard.”

In contrast, Bartz has played her hand very close to the vest so far, at least publicly, often discounting any effort to split up Yahoo.

In fact, at a Morgan Stanley (MS) tech conference in early March, she said:

“I am not going to negotiate with my 55,000 favorite friends….We’re going to negotiate as companies negotiate–and that’s privately. If something happens, you’ll know it then. Until then, there is no comment.”

(By the way, both Ballmer and Bartz have agreed to be interviewed onstage–separately, of course–at the D: All Things Digital conference in late May that Walt Mossberg and I run–so we will be sure to try to get one–not that they would give one!)

Last year, Yahoo EVP Hilary Schneider and then-Media Group head Scott Moore had a summery seaside dinner with Demand Media co-founder and CEO Richard Rosenblatt (pictured here) in Santa Monica, Calif., right around the corner from the online publishing company’s HQ.

While many speculated that Yahoo (YHOO) could be doing some friendly kibitzing to get a sense of where the eclectic network of general- and special-interest sites was headed, for a possible acquisition, nothing came of it.

That’s because at the time, Rosenblatt insisted that he was aiming to eventually take his company public and Yahoo was in the midst of ongoing corporate turmoil.

“There is a lot of potential here and I want to build a big company for the long-term,” said Rosenblatt in an interview with BoomTown last July (see video below).

But, as my post noted: “Still, at some point when Yahoo is not in the free fall it is currently in, Demand might make a great purchase for Yahoo.”

And now, a year later, as new Yahoo CEO Carol Bartz works to stop that slide, several sources close to the company tell me another look-see at Demand is likelier than ever.

That’s underscored with recent indications that a major strategy will finally follow through on making Yahoo’s massive but disparate service more social, especially its content offerings.

But would Bartz go as far as making a big buy now or would she be more likely to strike a massive partnership with Demand, from which Yahoo could learn a lot?

Such an acquisition could cost anywhere from $1.5 billion to–as was floated last year in better times–$3 billion. In addition, if Demand was to engage in more serious talks with Yahoo, there would likely be other suitors.

As costly as that is, some sort of link-up with Demand is an interesting idea, especially since Yahoo could use a bold and definitive move to signal social goals that play to its strengths and are not a copycat of more powerful social-networking sites now in place.

At a Morgan Stanley (MS) conference last month, Bartz said, for example, that “I do not believe we can invent the next Facebook,” while noting Yahoo still needed to be more social throughout the service, especially in its content.

And, just yesterday, a Reuters article about that focus was titled: “Yahoo’s Plan: Create Community from Isolated Sites.”

Said the article: “If [Yahoo co-founder David] Filo and new CEO Carol Bartz have their way, the kinds of social networking features available on Facebook will become part of many Yahoo websites and allow their users to network with each other without using Facebook. The company hopes the strategy will help link its disparate properties, bringing more advertising dollars and growth.”

And that’s just at the heart of Demand Media, which dubs itself the “leader in social media.”

Demand was founded in 2006 by Rosenblatt and Shawn Colo, who raised a giant pool of funding–$355 million–from gold-plated investors like Goldman Sachs (GS), Oak Investment Partners and even a private investment from major Yahoo investor Gordon Crawford.

Getting that kind of backing was due to Rosenblatt’s entrepreneurial track record.

As founder, chairman and CEO, he sold iMALL to Excite@Home for $425 million in a 1999 stock swap.

And, perhaps most famously, as CEO of Intermix Media, Rosenblatt sold it with the company’s crown jewel, MySpace, to News Corp. (NWS) for $580 million in cash.

Then, Rosenblatt started Demand, which takes user-generated content of all kinds and on all kinds of topics–especially via video–from an army of freelancers and leverages it into massive traffic that it monetizes.

Demand is also the one of the bigger suppliers of video to YouTube, which it also monetizes.

And, through the acquisition of Pluck, the company also laces social-networking tools throughout the sites, as well as for many well-known third parties.

All this has given Demand upward of 70 million unique visitors per month, at sites like eHow and GolfLink.com, with about $150 million in annual revenue.

And–drum roll please–it is reportedly profitable, although how much is not clear.

While he has long maintained a public offering was on the horizon, despite the weak economy, Rosenblatt has also been interested in the idea of how to revive major players like Yahoo and Time Warner (TWX) online unit AOL.

Both have been struggling, but still have massive traffic and brand recognition, along with large advertising businesses.

And in many ways, the energetic Rosenblatt is just the kind of product-centric and visionary exec Yahoo lacks, despite Bartz’s clear ability to get the company’s management ducks in order.

What could be even more interesting, said one source, would be to marry Yahoo and Demand with a lot of what is going on with the publishing of niche sites at AOL’s MediaGlow content unit, in a giant publishing network.

Ironically, AOL was another acquisition target of Yahoo, in yet another deal that did not pan out last year.

Here’s the interview with Rosenblatt at Demand Media HQ last year:

Back in the heyday, Peter Currie was the money man to see in Silicon Valley.

As CFO of Netscape Communications, he led the start-up into history, as the first great Internet rocket ship, when it went public on Aug. 9, 1995.

With the first consumer-friendly browser software, which made the Web easily understandable to the masses, Netscape was at the red-hot center of the nascent digital revolution.

“Wall Street went bonkers,” said one news reporter about the IPO, and the craziness did not stop for quite a while.

Rising to insane levels, the stock was ground zero of the Internet gold rush too, despite the fact that it had no profits to speak of.

But it did have a 23-year-old co-founder and tech wunderkind in Marc Andreessen, and a growth trajectory that was astounding.

If you think it sounds somewhat similar to Facebook today–where Currie will now help out as temporary financial adviser after the social-networking site parted ways with its CFO, Gideon Yu, yesterday, following mutual disagreements and announced a search for a replacement–you are correct.

In that job, the 53-year-old Currie will be helping Facebook CEO and founder Mark Zuckerberg, 24, navigate–albeit temporarily–through some stormy economics seas on a journey that will hopefully end in an initial public offering.

The search for a new CFO will also involve Currie, obviously, and will be conducted by Jim Citrin of Spencer Stuart.

But until a new CFO is in place, Facebook’s quest still entails sorting out a substantive advertising monetization strategy while also keeping up its speedy growth rates and managing the high costs that mount with its popularity.

That certainly was Netscape’s major challenge, which it never met successfully and which was made worse by intense attacks from Microsoft (MSFT) on Netscape’s core browser business.

That eventually led to the antitrust trial against the software giant, even as Netscape saw its star fall dramatically.

It was sold to AOL in 1998 for $4 billion, a shadow of its bubble valuation, and is now more of a footnote than an ongoing tech product (although the now-popular Mozilla browser is a direct descendant of Netscape).

In fact, in 2008, Time Warner (TWX) online unit AOL dropped its support for the Netscape browser and said it was no longer releasing new versions.

Still, a lot of former Netscape execs now hold other key jobs in the Web space.

Its investor relations exec, Quincy Smith, now heads up the digital arm of CBS (CBS), for example.

And Andreessen has started a number of companies and has transformed himself into an kind of elder statesman of Silicon Valley of late, as well as a newly minted venture investor.

Andreessen, many sources said, was a shadow influence on Zuckerberg’s decisions related to Yu, with whom relations had gotten tense, and to bring in Currie (pictured here).

Currie is certainly a great choice, in terms of the close-knit tech sector’s respect and experience.

Currie is also unusually tall, aggressively avuncular and laid-back, loves Elvis and enjoys pranking reporters like BoomTown. (Case in point: He once tried to spread the rumor that I am short due to a medical condition.)

Now the president of Currie Capital, a private investment firm, he had previously worked at General Atlantic in private equity.

After Netscape, he was a partner and co-founder of the Barksdale Group, an early-stage venture capital firm.

Before Netscape, he was CFO of McCaw Cellular Communications and also worked at Morgan Stanley (MS).

Currie is also board-happy, serving as a director of a variety of tech firms, private and public. They have included CNET Networks, Critical Path, Clearwire (CLWR), Safeco, Ofoto, Tellme Networks and Zantaz, as well as Sun Microsystems (JAVA).

He has an MBA from Stanford University and went to Williams College.

Here is the video interview I did with Currie and others at an event to support his friend and former Netscape exec Mike Homer, who recently died of Creutzfeldt-Jakob disease (Currie is at the 2:16-minute mark):

(Image of Netscape IPO T-shirt courtesy of intothefuzz on Flickr.)

BoomTown is no fan of PowerPoint, but this one by longtime Morgan Stanley Internet and technology analyst Mary Meeker at the Web 2.0 Summit in San Francisco yesterday is made worse by its depressing content.

Meeker, a veteran who was around for the last Web 1.0 meltdown, should know from grim. An inveterate numbers cruncher–I actually met her 15 years ago, while she was crunching a different set of numbers on AOL late into the night at her New York office–she pulls out a lot of tough ones here.

Still, as usual, from the typically forward-looking Meeker, there is hope eventually.

But let’s let her show you, via the presentation she made yesterday.

Here it is (click the screen icon in the right corner to make it larger):

Sound familiar?

Bostock (pictured here)–apparently, the hardest working man in U.S. corporate board rooms–also happens to be the chairman of Yahoo (YHOO), which is in the midst of a takeover wrangle with Microsoft (MSFT).

So, if he managed to reach some sort of deal–either with AOL (TWX) or Microsoft–that would settle the fate of Yahoo this week, as some are speculating, I think some kind of medal would be in order.

And let’s not leave out the irony of the fact that the former top ad exec is also on the board of Morgan Stanley (MS), which is repping Microsoft!

Roy Bostock=Human pretzel!

Of course, there are still a lot of outstanding issues in the Delta-Northwest deal–including possible employee resistance and regulatory insistence. But getting this far in such a deeply troubled industry as airlines is a good sign that the much easier Yahoo situation can be settled.

Interestingly, under the proposed Delta-Northwest deal, Bostock would become vice chairman of the combined entity, which would use the Delta name.

Also a good sign–a willingness to shed your corporate independence and be OK with it.

While the group met with polite audiences, most investors I talked to were unenthusiastic about the plan and dubious that Yahoo’s blue-sky hopes would come through. “I think we wanted to give Jerry a hearing, but mostly to save face,” said one investor, in a sentiment that was typical.

What Yahoo (YHOO) was selling, of course, has been a plea for time from shareholders and a way to signal Microsoft (MSFT)–which made an unsolicited bid for the company in the beginning of February–that a price rise was needed to complete the deal. In addition, so far, no alternative offers have panned out.

Thus, last week, Yahoo released information about its future prognosis, saying there would be no surprises for 2008 off guidance, strong gains in revenue and cash flow for 2009 and 2010 and a resulting share price closer to $40, $9 above the original $31 a share–the cash-and-stock offer is actually now worth about $29.50–offered by Microsoft. (See chart.)

Interesting, Microsoft has been unusually silent on Yahoo’s growth predictions, which to me signals: Unimpressed, not inclined to raise its price and increasingly bored waiting for the inevitable call to negotiate.

But that call, I think, will now have to happen–even though I would bet my precious “Beverly Hills 90210″ pilot episode DVD (seen here!) that Microsoft’s Morgan Stanley (MS) bankers and Yahoo’s Goldman Sachs (GS) bankers have been secretly communicating for a while now.

(Morgan to Goldman: “Ignore what the left hand is doing–it will stop gesticulating wildly soon and we can begin bargaining and collect our big fat fees!”)

So do others: “I now give it 14 days,” said one person who has experience in merger back-and-forth Kabuki dances. “There are no more moves to delay this, although you have to give Yahoo credit for its efforts.”

Extra credit even! But is that all there is?

Some at Yahoo do not agree. One person close to the company noted that Yahoo’s situation is like that of financial software maker Intuit (INTU), which was not bought by the software giant in 1994.

“Remember what happened to their deal with Microsoft?” said the person.

Actually, I do. After a lot of behind-the-scenes pressure from Microsoft, Intuit Founder and CEO Scott Cook struck a deal with Microsoft’s Bill Gates in which the company got a 40% premium, or $1.5 billion in Microsoft stock.

That deal was only scuttled, when the Justice Department stepped in and threatened to file suit to stop the union.

Thus, Yahoo’s only hope is the Justice Department, defanged under the Bush administration and with the existence of a major online rival like Google (GOOG) to point to as competition?

It could happen, I guess. But, I would have to say: Count me dubious.

Please see this disclosure related to me and Google.

RockYou, widget maker, is the latest example of a sane valuation heartbreaker, as it is undertaking efforts to secure an investment from mainstream financing firms that would value the company at between $300 million and $400 million.

First reported by Valleywag last night, the start-up, said one source, “is being squired around Wall Street” by investment behemoth Morgan Stanley (MS), in search of the same kind of deal its rival Slide got in January.

BoomTown broke the news of that deal, which nabbed Slide $50 million and a $550 million valuation with investments from blue-chip investors T. Rowe Price (TROW) and Fidelity.

Thus, RockYou’s motto: Anything Slide can do, we can do slightly smaller!

And, indeed, not to be SuperPoked by Slide CEO and Founder Max Levchin, sources said RockYou Co-Founders Jai Shen (also CTO) and Lance Tokuda (CEO) were quickly on the march for their own payday.

It is, in fact, a quest that a lot of Web 2.0 companies seem to be on, since the sector’s fearless leader–Facebook–got its $240 million and $15 billion valuation from Microsoft (MSFT) last year.

All of this frantic funding activity is, of course, this bubble’s version of going public–grab big cash investments from investment firms and hedge funds, desperate for a good bet on the sector, without the pain of public scrutiny of questionable business prospects that did in Web 1.0 shooting stars.

It’s that or get bought for an ungodly sum by equally desperate Web 1.0 companies (See: AOL+Bebo).

Sources close to RockYou, which has had acquisition feelers put out to it from larger companies in the past, said the company has had several strong offers of funding, but it is trying to select the right partners for the latest round of funding.

“We want our investors to be strategic and helpful to the company,” said one person close to RockYou.

RockYou has so far been funded by Sequoia Capital, Lightspeed Venture Partners and Partech International.

(Interestingly, Sequoia backs another instant messaging and chat widget maker, Meebo, which is reportedly seeking a $250 million valuation, which I posted about here yesterday).

To be fair, makers of highly distributed third-party apps like RockYou are garnering immense traffic and their widgets are syndicated everywhere. RockYou’s Super Wall, which lets you turbocharge your digital wall, for example, is one of the most popular on Facebook.

Other RockYou apps include: X Me, a communications tool that allows you to “Hug Her, Slap Him, Tickle Them!”; and Likeness, where you can “compare yourself with friends and movie stars like Angelina Jolie, Jessica Alba, Keira Knightley and many more.”

The company has been trying to monetize all this traffic and popularity and distribution, as well as knowledge of user behavior, by offering advertisers new forms of engagement.

But the jury is still out on these interesting but unproven efforts by all the social-networking players.

In any case, the money is apparently still flowing into these start-ups, taking a chance on them being the next big media play.

Here are two videos I made when I visited RockYou’s offices in San Mateo, Calif., last October, after I had called the widget market juvenile and faddish.

The first is my tour of the office, where I was playfully accosted by an infant–oops, a RockYou engineer–in a suit. The second is my interview with Shen and Tokuda.

One of the more unusual situations in the current stand-off between Yahoo and Microsoft is the stress it has likely put on the longtime professional relationship and personal friendship between Yahoo President Sue Decker (pictured here) and Blackstone Group’s Jill Greenthal.

That’s because Greenthal (pictured here) is advising Microsoft on this deal, along with Chuck Cory and Paul Taubman of Morgan Stanley (who was actually Time Warner’s banker in its disastrous AOL deal).

Yahoo is being repped by Goldman Sachs, Lehman Brothers and Moelis & Company, an advisory boutique. All the firms on both sides stand to reap hundreds of millions in fees, if the deal is consummated.

Greenthal is a good pick for Microsoft to get the job done. She has a long-time knowledge of Yahoo, having worked with the company when she was at the Credit Suisse Group on the $1.45 billion purchase of Overture, one of Yahoo’s smarter purchases.

And her ties to Decker go back even further, when Greenthal was a banker at Donaldson, Lufkin & Jenrette. The pair worked together frequently at DLJ, where Decker was an analyst and research director before heading to Yahoo.

Back in 2003, in a BusinessWeek profile of Decker, Greenthal noted about Decker’s tenure at DLJ: “[Executives] didn’t always like her opinions of their company or industry, but they respected her.”

A source in Silicon Valley who knows both Decker and Greenthal said that the two have avoided speaking since the unsolicited Microsoft bid was launched by Microsoft CEO Steve Ballmer in an evening phone call to Yahoo CEO and Co-Founder Jerry Yang two weeks ago.

But one might also imagine their bond could also become a critical bridge in bringing the companies to finally make a deal, as many big shareholders are urging and Yahoo has been resisting.