Microsoft digital head Qi Lu took to the stage at the Web 2.0 Summit conference this morning, where he confirmed a “strategic” deal with both Facebook and Twitter to integrate real-time information into Microsoft’s Bing search service.

BoomTown broke news of those twin deals earlier today.

Bing’s Twitter integration in beta form is now live here (see an image of it below; click on it to make it larger).

Facebook’s integration will come later, said Microsoft (MSFT).

Before announcing the deal, Lu–who is a quintessential techie–first went a bit deep into the weeds to talk about “how we think about search.”

Said Lu: “To start with, we think about search holistically…it’s about user intent. What it amounts to is that you are trying to build a mind reader.”

Top MSN exec Yusuf Mehdi then bounded onstage to talk about the deals with Twitter and Facebook and do a demo, which was what the audience gathered in San Francisco wanted to hear about and see.

“If today’s search is about getting to the UPS or the FedEx site, tomorrow is much more complicated,” said Mehdi, who described the deals as “strategic.”

Google (GOOG) is also in talks with both Twitter and Facebook about a similar arrangement, but Microsoft’s move was a clear one-upsmanship with its search rival.

And what Mehdi showed was impressive, with the ability to sort tweets in a number of ways.

Such information in search will obviously improve results.

Lu gave few specific monetary or operational details of the service–such as if Facebook and Twitter get a cut of its search advertising revenue or if Microsoft will archive the status updates–mostly focusing on Twitter, since it is first to roll out.

“This is just the beginning,” said Lu. “The Twitter corpus…is still evolving and emerging.”

Added Lu at the end: “Give us a try!”

Here is Microsoft’s press announcement on the deals with two of Silicon Valley’s innovation hotshots:

This morning at the Web 2.0 Summit in San Francisco, Qi Lu, President of Microsoft’s Online Services Division is announcing a new beta feature that enables people to easily search Twitter’s real-time information feed directly in Bing. This new feature helps people make better decisions and more fully understand Twitter conversations by collecting, analyzing and uniquely presenting real-time Twitter content.

More specifically, the new Twitter developments in Bing include:

A real-time index of the Tweets that match your search queries in results. This feature makes it easier to follow what’s going on by reducing the amount of duplicates, spam, and adult content.

Giving you the option to rank tweets either by most recent or by “best match,” where we consider a Tweeter’s popularity, interestingness of the tweet, and other indicators of quality and trustworthiness.

Providing the top links shared on Twitter around your specific search query by showcasing a few of the most relevant tweets. Additionally, Bing automatically expands those small URLs (like bit.ly) to enable you to understand what people are tweeting about. Instead of showing standard search result captions, we select 2 top tweets to give users a glimpse of the sentiment around the shared link.

You can try out the new Bing Twitter search beta here momentarily or learn more about it at the Bing blog. Please note that this is a U.S. only feature at this time.

Facebook Partnership

As part of his on-stage discussion at the summit, Dr. Lu is also announcing a global partnership with Facebook that will bring public Facebook status updates to Bing search results. The experience will be available at a later date.

In a stunning one-two punch, Microsoft will announce separate nonexclusive deals today with both Facebook and Twitter to integrate their real-time feeds of status updates into the Bing search service.

According to sources, Microsoft (MSFT) digital head Qi Lu will announce the deal onstage in a few hours at the Web 2.0 Summit.

BoomTown reported earlier today that the Microsoft data-mining deal with Twitter was poised to be announced.

But the addition of Facebook raises the stakes considerably because it has the largest pool of status updates, despite all the hype around Twitter. Facebook has previously stated that it has 40 million updates a day, on average, from its 300 million-plus audience.

Twitter has been talking to Google (GOOG) about a similar arrangement, and, according to sources, so has Facebook.

But the deal is a definite blow to the dominant search engine, since–for the first time–data will be available on Bing that are not available on Google.

Neither of the services is expected to be up and running for weeks, if not months. But there is the possibility of a demo today by Qi Lu of what it will look like.

What’s interesting about the deals, which have been in the works for several weeks, is that they will be very different.

Much of what is posted on Twitter is public by design, while Facebook users prefer the closed nature of the service to disperse a wide variety of personal information only to their friends, and they want to control it.

Thus, sources said, not all Facebook updates will be included in the real-time feed to be searched by Bing, but only those its users choose to make available to the wider public. Facebook will apparently provide users with a number of new tools to do so.

BoomTown first reported several weeks ago that Twitter was in advanced talks with both the search rivals about such a real-time search arrangement.

When asked about the talks onstage at Web 2.0 yesterday, Twitter CEO Evan Williams turned coy, according to numerous reports, joking “Whose deals?”

But, in fact, the San Francisco-based microblogging service was very much engaged in dealmaking aimed at gaining more visibility for the billions of tweets from its 54 million monthly users.

And so was Facebook, and it is probably a little irksome to Twitter that the rival social networking site will steal some of the thunder over the deal, which is sure to break out in the blogosphere today.

The two services represent the hugest trove of real-time and content-sharing information, generated from their massive data streams.

The deals with Microsoft might include a payment of several million dollars to both Facebook and Twitter, along with various revenue-sharing proposals that would give them a piece of the advertising revenue made from search results.

Doing these kinds of data deals with big search players does make a lot of sense, since it would be hard for both companies to turbocharge their own search engines without running into the big cash-laden guns at both Google and Microsoft, which recently launched the Bing search service.

Being deeply integrated into big search services would give both companies an even huger footprint.

Microsoft did a small experiment this past summer by integrating Twitter data into search results, starting with tweets of bloggers like me.

And the company provides search services to the Silicon Valley-based Facebook, part of a major investment deal it made several years ago.

Both Microsoft and Google had separately contemplated buying Twitter and Facebook in deals that never materialized.

But, if they both strike data deals with Twitter and Facebook, they will get the next best thing–an ability to offer all that real-time information to the masses from its most innovative sources.

According to sources, Microsoft is close to striking a nonexclusive data-mining deal with Twitter to integrate the microblogging service’s full feed into the results of its Bing search service.

News of the deal, which was still being worked on by engineers and execs at both the software giant and the start-up as late as yesterday, could even come as early as today at the Web 2.0 Summit conference in San Francisco.

Qi Lu, the head of Microsoft’s online services division, is being interviewed at the event at 11:30 am PDT.

Note: Lu is scheduled to appear onstage after Yahoo (YHOO) CEO Carol Bartz, who is now too sick to attend, the company said. She also missed Yahoo’s third-quarter conference call due to an unspecified illness.

Thus, Lu is the main event of Web 2.0 tomorrow morning and it would be a good place to make a big announcement, if the talks are successful.

But sources close to the situation caution that the deal could still run into a snag and was not yet complete, although it seems more likely than not that a deal will soon be struck with Microsoft (MSFT) first and then Google (GOOG), which is the other company Twitter has been negotiating with.

BoomTown had previously reported that Twitter was in advanced talks with both the search rivals about just such a real-time search arrangement.

There could be other possibilities on the table, said sources, such as one of the big companies advertising on Twitter or any number of other Twitter partnerships with either one.

When asked about the talks onstage at Web 2.0 yesterday, Twitter CEO Evan Williams turned coy, according to numerous reports, joking “Whose deals?”

But, in fact, Twitter, which is based in San Francisco, is very much engaged in dealmaking in this regard.

Here is what I wrote previously, as to what and why:

Sources said a number of scenarios are being discussed to compensate Twitter for its huge and potentially valuable trove of real-time and content-sharing information, generated from the data stream of billions of tweets from its 54 million monthly users.

These include a number of structures, including a payment of several million dollars to Twitter, along with various revenue-sharing proposals that would give Twitter a piece of the revenue made from search results.

The deals, stressed sources close to the situation, are nonexclusive, especially because Twitter’s management is keen to remain independent and also nonpartisan in the growing search battle between Google and Microsoft.

This means Yahoo–which recently struck a search-technology and online-advertising partnership with Microsoft–could also license Twitter’s feed to make its search results even more robust, although Boomtown could not determine if the company is in talks with the San Francisco start-up.

Sources said it is also possible that no agreement would be reached with either company.

And execs at Twitter, Microsoft and Google had no comment when asked about talks.

But doing these kinds of data deals with big search players does make a lot of sense, since it would be hard for Twitter to turbocharge its own search engine without running into the big cash-laden guns at both Google and Microsoft, which recently launched its new Bing search service.

Twitter is, instead, seeking to create a large open platform, which many could plug into, from search engines to marketers to publishers to developers.

Twitter has also been considering offering premium services to these groups and is contemplating some form of advertising offering.

But, most of all, Silicon Valley’s hot start-up is focusing now on spurring growth and engagement, along with fine-tuning its product offering.

Being deeply integrated into big search services would give Twitter a huge footprint.

Microsoft had already done a small experiment this past summer integrating Twitter data into search results, starting with tweets of bloggers like me.

How much indexing of its data Twitter will allow is unclear, but the company has certainly bought itself time to think carefully about all its options, given that it now has a lot of money in the bank.

Late last month, Twitter raised another $100 million in new funding, after already having raised $55 million.

This has given it a $1 billion valuation, despite negligible revenue.

The valuation also effectively stated that the innovative company was pretty much putting itself out of play to be acquired and is very interested in forging its own destiny.

Both Google and Microsoft execs have contemplated the idea of buying Twitter in the past, although no serious talks ever moved forward.

If they both strike data deals with Twitter, they will get the next best thing–an ability to offer all the information disseminated on Twitter in search results.

As Digital Daily’s John Paczkowski noted in a post in March titled, “Microsoft Acquiring Yahoo One Employee at a Time”:

First, Sean Suchter, VP of search technology at Yahoo, left to become general manager of Microsoft’s Silicon Valley Search Technology Center. Then, Yahoo search scientist Qi Lu followed him, tapped as president of Microsoft’s Online Services Group. And, soon after that, Larry Heck, former VP of search & advertising sciences at Yahoo Labs, accepted a job in the R&D department of the software giant’s online services division. Now, Yahoo alum Jan Pedersen has joined them as well. Admittedly, Pedersen arrives at Microsoft by way of Amazon’s A9.com. But prior to that gig, he was chief scientist and VP, Search and Advertising Technology Group at Yahoo.

But Yahoo U.S. advertising sales head Joanne Bradford–who worked at Microsoft (MSFT) for many years–obviously knows how to play that game and has managed to grab one of the its top ad sales execs, Seth Dallaire.

Yahoo (YHOO) confirmed that Dallaire (pictured here) joined the company last week, as VP of mid-market sales, a newly-created role responsible for all mid-market sales efforts across search and display advertising.

Dallaire had been at Microsoft for seven years, most recently running its retail vertical and Midwest region. Previous to that, he ran business development partnerships at Amazon (AMZN).

Eric Boyd (pictured here), a high-profile techie from Yahoo who left the company for a start-up last year, is now headed to Microsoft to work for its digital group, now run by another ex-Yahoo, Qi Lu.

UPDATE: Microsoft confirmed the hiring, although declined to provide further details.

Boyd, who is well-known for his card-counting team exploits while at MIT (which were later made into the movie, “21”) had been VP of platform engineering at Yahoo (YHOO) and worked on a variety of projects there.

With the addition of Boyd, sources said, Microsoft has acquired a huge swath of the top tech talent of Yahoo, many of whom came to the software giant because of Lu and to escape the turmoil at Yahoo.

At a recent tech offsite at Microsoft held by Satya Nadella, SVP of Research and Development at its Online Services division, in fact, one person remarked that a full 10 percent of the techies were former Yahoo execs.

There will be more to come, up to 400 or more, if the search partnership the pair recently struck passes regulatory muster, although Boyd is not part of that deal.

He had worked at Yahoo for a decade, but left last spring to take over as VP of engineering at Mochi Media, a San Francisco-based gaming-related start-up backed $14 million in funding by Shasta Ventures and Accel Partners.

He will be working for Microsoft (MSFT) in Silicon Valley, in its group related to search and advertising, sources said.

Brad Garlinghouse’s appointment to a new job at AOL today as its new communications czar is yet another sign of an interesting trend for those keeping score of the comings and goings of top Internet execs.

Garlinghouse came to the Time Warner (TWX) online unit after a year-long break, preceded by six years at Yahoo (YHOO).

As anyone who watches the digital space knows by now, this kind of management musical chairs is common and never-ending.

In fact, borrowing a quote by IAC/InterActiveCorp (IACI) CEO and chairman Barry Diller from an onstage interview I did with him at the sixth D: All Things Digital conference and switching out Hollywood for Silicon Valley: “[It] is a community that’s so inbred, it’s a wonder the children have any teeth.”

But, given all the movement of late, this insider seat-switching seems more frantic than ever, as allegiances shift, competitors become friends and colleagues become rivals faster than you can tweet.

When he left Yahoo last summer, in fact, the digital chatter was that Garlinghouse would take a job either as a venture capitalist (he had been one once) or helming a start-up (that too, at Dialpad.com).

In fact, sources said, Garlinghouse had been considering two mobile gigs, but opted for helping to try to overhaul a troubled Web giant.

Fixing messes was the impetus of Owen Van Natta, who left a top job at social networking giant Facebook in early 2008 and by the end of the year, headed over to run Project Playlist, a controversial online music-sharing service.

But then he had hightailed it by spring to try his hand at reviving MySpace, as its CEO.

His boss, News Corp. (NWS) digital head Jon Miller, did the same, getting the hook (unfairly to my mind) at AOL several years ago and then creating an investment firm with former MySpace head Ross Levinsohn.

The pair considered being part of a bid to oust Yahoo management in 2008.

Miller’s freedom lasted only until he got an offer that he presumably could not refuse from News Corp. head Rupert Murdoch recently. (Full disclosure: News Corp. owns Dow Jones, which owns this site.)

The list goes on, chock full of ex-Yahoos, in fact.

Its one-time COO, Dan Rosensweig, left the company in 2006, for example, and joined the well-known private-equity firm, Quadrangle Group.

But, soon enough, he was scooped up by Activision Blizzard (ATVI) to run its Guitar Hero division.

Yahoo Network head Jeff Weiner also departed from the Internet giant, in mid-2008, for a stint at two VC firms.

He landed at LinkedIn, the business-networking service where he was named CEO in late June.

Greg Coleman ran Yahoo ad sales until mid-2007 before taking a job at AOL earlier this year, which he lost after it got new management soon after.

At Yahoo, Coleman sparked with former advertising sales head Wenda Harris Millard, whom he ousted. She went onto Martha Stewart Living Omnimedia (MSO) and left there this spring for the Media Link consultancy.

Presto! She is now helping MySpace’s Van Natta fix the social networking site’s ad business.

Current Yahoo U.S. advertising head Joanne Bradford actually came from Microsoft last summer, via her own short visit to the troubled ad start-up SpotRunner.

Former Yahoo search techie Qi Lu now runs digital for Microsoft (MSFT), along with a big gang of ex-Yahoo techies he has recruited.

And Scott Moore is even better at the switcheroo. He was at Microsoft running MSN U.S. content, switched to Yahoo as its media poobah, left last year to consider a start-up and then headed back to Microsoft as head of U.S. content this year.

But former Google (GOOG) execs have also been busy shuttling hither and yon, mostly to innovative start-ups.

Of course, many find refuge at Facebook (COO Sheryl Sandberg, PR major domo Elliot Schrage and many more) and Twitter (GC Alexander Macgillivray and COO Dick Costolo).

Recent departures–such as Sukhinder Singh Cassidy, who landed at Accel Partners for now–are also likely to find new homes soon enough.

And, of course, there’s always Garlinghouse’s new boss, former Google ad head Tim Armstrong, who took over at AOL earlier this year.

We’ll skip former Joost CEO and former Cisco (CSCO) exec Mike Volpi (who is now a VC); former Netscape Communications/short-term VC/ex-banker/current-for-now CBS (CBS) digital head Quincy Smith; and Joanna Shields, who has worked at Real Networks (RNWK), Google and Bebo (which was bought by AOL)–for now.

Because, around and around and around it always goes, as you can see in this funny video below, which I posted previously:

[Musical Chair designed by Jacob Mathew.]

As the wind-up act for the Financial Analyst Day at Microsoft today, its CFO, Chris Liddell, took the stage to try to put a shine on weak financial results that the software giant recently reported.

“So, what genetic disposition do you need to be a CFO? Essentially, you need to be miserable, you need to be the sort of person who takes drinks away from people at the end of a party,” said Liddell. “So, you know, my colleagues who have been giving you drinks all day, have told me to come out here and take most of them away from you.”

This was an unusually charming opening for typically dull CFOs, made even more so since it was delivered in Liddell’s jaunty New Zealand-Hobbit accent, which turns words like “share” into “sheeaar” and “schedule” into “shed-you-all.”

But no matter how cute the delivery, Liddell could not make the recent financial performance at Microsoft (MSFT) look adorable. The company missed revenue estimates by $1 billion in its most recent quarter.

Said Liddell: “And, not surprisingly, from a revenue point of view, it turned out to be a fundamentally different year than we thought it would. So, when I stood up here last year and said we thought our revenue would grow, it actually shrunk by three percent.”

Liddell dubbed the new economic situation the “new normal,” which sounds like it could be the topic on an “Oprah” show.

Still, Liddell, who has been a grumpier CFO than most during this econalypse–I once dubbed him “Glum Chris at the Recessiondome”–was more positive going forward.

“I can’t say this is good that we’re still down relative to where we were a year ago,” he said. “But, on a relative basis, it was a reasonable year from a shareholder value point of view, given the context of the environment that we had.”

Liddell said Microsoft was now operating in a “reset” mode, a term often used by Microsoft CEO Steve Ballmer.

“The economic path that we are all going to face, regardless of any industry, is going to be relatively subdued compared to what we’ve been through,” he said. “So, those companies that are going to drive superior shareholder value in the new environment are not only going to be the ones that mapping the reset in a very good way, but are going to manage the new normal in a particular way as well.”

That means having cash, controlling costs, pushing for innovation and market share, said Liddell.

He forgot to add judicious coupon-clipping!

After he was done, Liddell was joined onstage for an executive Q&A by Ballmer, COO Kevin Turner, Online Services President Qi Lu and, finally, Chief Software Architect Ray Ozzie, who was apparently in the special guest star role for this year’s meeting.

It was emceed by investor relations guy Bill Koefoed, who I must admit, is not even close to as dull as he is when reading all that legal mumbo-jumbo at quarterly earnings call.

(Even to my assistant Ed–to whom Koefoed’s voice is like Valium, since I listen to those calls on a speakerphone at All Things Digital HQ, and it puts him into a deep stupor.)

There were various questions for the execs–all men, by the way, although who’s counting? Well, okay, me!–including:

* Whether Microsoft might make more acquisitions.

“We don’t acquire as a strategy,” said Ballmer flatly.

* Its relationship with Yahoo (YHOO) going forward and if it might lead to even closer ties.

“If there was an implicit question are we interested in a full acquisition, the answer is no. Yahoo is happy to be independent, we’re happy to be independent, we’re delighted with search partnership,” said Ballmer even more flatly.

There were also a whole bunch of financial questions, most on the far side of wonky. Ozzie spoke only briefly about big computing ideas, which is his job at the software giant.

And then it was over and he and the other big execs headed for cocktails with those gathered.

And, last I saw, Liddell was not wrestling any drinks from the attendees. Not yet, at least.

Isn’t it ironic that Yahoo once employed–and for a very long time–top search techie Qi Lu and here he was on stage today at the Financial Analyst Meeting at Microsoft HQ in Redmond, Wash., after having just scooped up that business for the software giant.

Lu, who is now president of the Online Services division at Microsoft (MSFT), was a key player in the deal that was announced yesterday between it and Yahoo (YHOO), under which Microsoft licensed Yahoo’s search technology for a decade.

Lu was not generous with the details, although he did say making the partnership work was his No. 2 priority after Microsoft’s own search business. No. 3 was being financially responsible.

Said Lu, in part: “First, search is our number–one priority…second, a big priority for us is implement the Yahoo partnership. It is a 10-year partnership. We’re absolutely committed in spirit, in everything we did to deliver the true economic values, consumer benefits, customer benefits for advertisers, publishers all around.”

Because of the scale it brings, Lu said that the deal has the potential to be lucrative, despite the fact that Wall Street thinks Yahoo sold out of its search technology too cheaply.

But he also tried to manage expectations. “And I keep telling my teams, we want to be brutally honest about where we are…and understand the hurdles we have to overcome,” said Lu.

Microsoft Business President Stephen Elop, who was on next, talked a lot about how Microsoft was dealing with the tough economy and its impact on the company’s software business.

He also gave updates about a range of its various products, including the upcoming Office 2010.

“Now, despite the difficult economic challenges, despite the end of a product cycle, what we believe, as evidenced by the strength of our annuity business, is that there’s incredible excitement out there in the market because of Office 2010,” said Elop. “So, at a time when we expect business productivity or business spending climate to improve, we are launching the most innovative wave of technology we have ever launched.”

Elop used the term “attach rate” to talk about the how users relate to Microsoft software, although I have often thought about how much I wanted to get a divorce from Microsoft Outlook.

After Elop, another business-type exec, Servers and Tools President Bob Muglia, who also had to deliver not-such-great news.

Said Muglia: “What we saw was that as the economy got soft, so did the customer buying, the business buying for servers, and starting around the middle of October into the end of our fiscal second quarter, and certainly through the entire part of our second fiscal half, this calendar year, we’ve seen a pretty dramatic decline in the server marketplace.”

And, after that, when he started talking annuity sales, virtualization and modular data centers–I’ll admit it–this is precisely the moment when I went out for an emergency cookie run.

After Q&A with Elop and Muglia, next up: CFO Chris Liddell (and his delightful New Zealand accent) to talk about–hopefully–Microsoft’s billion-dollar revenue miss in its most recent quarter.

The fun never stops at Microsoft, it seems.

Well, not fun–more like a long march of khaki-clad Softies.

They will be on display bright and early this morning at the company’s annual Financial Analyst Meeting, a cavalcade of top execs at the tech giant blabbing away.

BoomTown will be there covering it in person, natch!

The Microsoft management smorgasbord includes:

CEO Steve Ballmer, COO Kevin Turner, Entertainment and Devices President Robbie Bach, Online Services President Qi Lu, Microsoft Business President Stephen Elop, Servers and Tools President Bob Muglia, Chief Research and Strategy Officer Craig Mundie, Chief Software Architect Ray Ozzie and CFO Chris Liddell.

I am betting that most of the focus at the gathering, which is being held at the worldwide HQ of Microsoft (MSFT) in Redmond, Wash., will likely be on two major events over the last week–its billion-dollar revenue miss in its fourth quarter and its just-born search and online advertising deal with Yahoo (YHOO).

The former, of course, was bad news for Microsoft, as it continues to signal weakness in its core operating system software and server businesses, due to lower demand for personal computers in the midst of the econalypse.

The latter was good news, of course, since Microsoft seemed to score a coup in nabbing the search technology business from Yahoo with no big upfront payments.

I have a lot of questions about both these issues, as will the crowd of reporters and Wall Street sharpies at the FAM, which is what they call the meeting here.

There could even be be plenty of answers, especially given that the entire leadership of Microsoft will be there.

Here is a link to a live Webcast of the FAM event, if you want to join the party too.

Unless there is some major glitch, there might finally be a search and online advertising deal struck between Yahoo and Microsoft at long last.

Top executives at Microsoft–including SVP of the Online Audience Business Group Yusuf Mehdi, search head Satya Nadella and top digital exec Qi Lu, as well as others–have all flown down to Silicon Valley from their Redmond, Wash., HQ today to iron out the remaining issues, which seem to have to do with the deployment of technology.

“It is an entourage,” joked one exec.

Microsoft CEO Steve Ballmer is also deeply involved in the talks, although he is not with the group.

If all goes well, the deal could be announced within the next week, sources at both companies said.

The most recent talks have been unusually close to the vest at both companies, and spokespeople for both Yahoo (YHOO) and Microsoft (MSFT) declined to comment on the issue.

And, of course, they should not, since there is no certainty any deal will be struck at all, especially since the pair have been down this road before, unsuccessfully.

In those cases, both sides have thought they were close, too, with fingers quickly pointing at each other for the failure of the discussions.

While BoomTown has gotten several different versions of terms of the latest deal, they all include Microsoft (MSFT) paying Yahoo (YHOO) several billion dollars upfront to take over its search advertising business and guarantee certain payments back to Yahoo.

There is also a display advertising element to the deal, which would likely have Yahoo take the lead in selling premium advertising for the companies.

That they are so close is a good sign, although sources on both sides of the deal cautioned that it could just as easily come apart.

And, indeed, Microsoft and Yahoo have long argued the particulars of this deal, including over the rate for traffic-acquisition costs, the ability of Yahoo to have control over data and the simple fact that such an arrangement is exceedingly complex.

But, said one person close to the situation, “It is down to the short strokes, for sure, it is just a question if we can finally close this.”

That’s a good question, given the push-me-pull-you relationship between Yahoo and Microsoft over the last two years.

But both need each other, especially since they lag so far behind search market leader Google (GOOG).

Yahoo was even ready to strike a similar deal with Google in the midst of Microsoft’s hostile takeover attempt last year. That partnership failed due to regulatory concerns.

Talks between Microsoft and Yahoo have waxed and waned too, as I reported earlier this week.

When last we checked in, Yahoo CEO Carol Bartz and Microsoft’s Ballmer had a little private tete-a-tete about the deal, when both were attending the seventh D: All Things Digital conference in Southern California in late May.

Bartz and Ballmer also both acknowledged discussions in onstage interviews at D7, with Bartz even boldly stating that she was open to the deal if good and reliable data and “big boatloads of money” were forthcoming from Ballmer.

(You can see the video of her saying that here, while Ballmer is less colorful here.)

Since then, Microsoft did an aggressive launch of its new Bing search service, which has been an initial success.

The company has become more confident with the early success of Bing, which has garnered good reviews and small improvements in market share in surveys.

Sources at the software giant maintain that the improvement–via innovation and a huge marketing spend–has given Microsoft a bit of leverage against Yahoo, although the bets are still out on exactly how much sustained share Bing can garner.

Yahoo is aware, of course, that is can ill afford to lose search market share, although Bartz has been focused on beefing up Yahoo management and marketing.

Still, the companies have never given up on the talks, which began in March, although all the back and forth underscores a very real debate by both sides about whether joining together will benefit them both or not.

The possible pluses are clear: Huge technology cost-savings and cash for Yahoo and another weapon to fight archrival Google for Microsoft.

It needs as much firepower as it can get. A recent comScore (SCOR) report for June showed Google with a 65 percent share, Yahoo at 19.5 percent and Microsoft at just 8.4 percent.

The deal, if struck, could give a big boost to shares of both companies, which have been up a lot since the beginning of the year.

While sources at both sides stressed that this was in no way a merger, a deal would bind their fates together rather strongly.

There was a report earlier today by 24/7 Wall Street that a deal was “imminent.”

One source advised caution when asked about that word, although this person was more confident than ever.

In any case, if it does not work out, the source said, “this will be it…we will all finally go our separate ways and be done with it.”

Later this afternoon, BoomTown will be front and center–well, I will probably get seated on the far side and way back–for a speech to be delivered by Microsoft CEO Steve Ballmer at Stanford University’s Memorial Auditorium on innovation and entrepreneurship. Part of the Entrepreneurial Thought Leaders Seminar, it is aimed at students there who are looking for some advice from tech’s big dogs.

Ballmer is, of course, all that, with a blustery bark and an occasional bite.

Of course, he’s probably channeling a more charming demeanor in another meeting sources say he plans to have with Yahoo CEO Carol Bartz on this visit to Silicon Valley.

The second since Bartz took over Yahoo in January, it’s about whether or not the pair should make nice after a long period of useless acrimony, and strike a significant search and advertising partnership.

Many close to the discussions, which have been going on seriously since late March between small teams from both companies, said that how the pair get along and whether they can actually pull the trigger together is all that matters.

Rapport is key, especially since such a deal has been exceedingly complex to figure out.

The latest idea is one in which Yahoo (YHOO) would take over both search and display advertising sales and Microsoft (MSFT) would run the tech for both behind the scenes.

It’s not clear if trading other assets–-such as content–-or a large investment in Yahoo by Microsoft are being considered too.

If struck, such a deal would be a major shift for both companies in their business focus and would also tether them tightly together to better compete with Google (GOOG), which overwhelmingly dominates the lucrative search market.

Still, sources said, there is a lot keeping Microsoft and Yahoo apart, most especially a profound wariness over controlling key technologies and tense history between them.

In addition, execs on both sides–such as Microsoft digital head and former Yahoo tech exec Qi Lu–are treading carefully about every item, unsure of how so many ties would be handled.

“Could we fire Microsoft if they did not perform?” asked one Yahoo exec. “Or would we be stuck without control over our destiny, if it all went south?”

For her part, sources who have spoken to Bartz about the recent discussions with Microsoft said, she has remained resolute in not giving up too much power to Microsoft.

Microsoft is also gun-shy after its disastrous takeover attempt of Yahoo failed last year–with Ballmer loath to make another such epic mistake in trying to turn around the software giant’s lackluster digital efforts.

“He simply does not want to look stupid again,” said one Microsoft source. “So it weighs on whether he has the guts to put himself out there.”

That’s ironic, of course, since his Stanford speech today is on entrepreneurialism and innovation, which always require an ability to use failure as a way to move forward.

The question is, can Ballmer walk that talk?

Recently, BoomTown reported that talks between Microsoft and Yahoo had gotten “hot and heavy.”

That mood seems to be continuing, as many sources close to the situation on both sides said that the pair are coming ever closer to a search and advertising partnership deal.

Said one source: “It’s closer than it has ever been…we’re finally talking about the how rather than the if.”

“It’s meaningful,” added another source. “The fact that there is even progress and engagement, after so many failed attempts between us, says a lot.”

Indeed, it remains a good sign that there seems to be a lot of engagement between the two sides of late, and some sources think a deal could even be struck within the next few weeks.

As I also reported last week, the latest idea is one in which Yahoo (YHOO) would take over both search and display advertising sales and Microsoft (MSFT) would run the tech for both behind the scenes.

It’s not clear if trading other assets–such as content–or an investment in Yahoo by Microsoft are being considered too.

In any case, any such deal would be a major shift for both companies in their business focus and would also tether them tightly together.

Many think they need to be tethered, given that Google (GOOG) overwhelmingly dominates the lucrative search market. Yahoo is strong in display, although that market has been harder hit in the recent economic downturn.

But whether or not Yahoo and Microsoft can come to a partnership agreement–given the deep complexities of the situation, the wariness over controlling key technologies and tense history between them–is a big if, of course.

Still, sources on both sides seem more positive than ever before.

Microsoft execs, for their part, report that new Yahoo CEO Carol Bartz is much more straightforward to work with than former CEO Jerry Yang.

And Yahoo’s side seems convinced that Microsoft appears more willing to make a deal happen and is more flexible on terms than in previous encounters.

Both sides are using very small teams to discuss the possible partnership, mostly in Silicon Valley. Some of the Redmond, Wash.-based Microsoft team, in fact, are in the Bay area now.

Sources said those involved on the Microsoft side include: Digital head Qi Lu, a former Yahoo tech star; top M&A and strategy exec Charles Songhurst; Online Audience Business SVP Yusuf Mehdi; and several others.

On the Yahoo side: North America EVP Hilary Schneider, who leads the efforts; General Counsel Michael Callahan; top Yahoo ad operations techie Mark Morrissey, who was key to its revival of the Panama ad system and has recently been leading product development on its new ad platform; finance SVP and Chief Treasury Officer Mike Gupta; and Products EVP and CTO Ari Balogh, although he is more in the background.

Of course, the only two execs who will matter, if these teams finally manage to hash out details, are Yahoo’s Bartz and Microsoft CEO Steve Ballmer, as well the both companies’ boards.

Interestingly, Ballmer is slated to be at Stanford University’s Memorial Auditorium to give a lecture on innovation and entrepreneurship as part of the Entrepreneurial Thought Leaders Seminar on Wednesday afternoon.

Whether Ballmer is seeing Bartz on this trip or not is not clear.

But he has to at some point. The approval of a deal–which could be struck soon, if terms can be reached–will be entirely their call.

[Postcard image courtesy of CarbonClothing on Zazzle.com.]

Microsoft is searching for a major executive to run its world-wide online sales, said several sources close to the situation, even as talks with Yahoo about a deal to partner in its search and display advertising businesses continue.

“They need to find a way to make money in display,” said one source close to the situation. “Or, I guess, find a way to not lose quite so much.”

The software giant has been trying to build its online business for many years now, spending a lot of money and not getting very much traction.

In its recent quarterly results, in fact, Microsoft’s online services got hit badly, with a 14 percent decline in revenue from a year ago to $721 million. Losses doubled to $575 million.

Sources said Microsoft (MSFT)–which has hired headhunting firm Spencer Stuart to conduct the search–is looking for more execs to turbocharge the situation, with one criterion being that the person hired is “another ambassador to Madison Avenue.”

Last fall, it did that by hiring Time Inc. ad exec Robin Domeniconi to take over as the new VP, U.S., Microsoft Advertising.

That’s why the new sales candidate the company is looking for might only be for someone to lead Microsoft’s international ad sales, since the exec in charge of that business left in December as part of a mass of changes in the wake of the hiring of digital head Qi Lu.

Those changes included the departure of that exec, Global VP of Sales Bill Shaughnessy, as well as its top online ad sales exec, Brian McAndrews, and the rejiggering of its online sales unit.

In that switch, Microsoft said in a press release: “The field sales organizations in the Online Services Group will move to Microsoft’s centralized Sales, Marketing and Services Group led by chief operating officer Kevin Turner. This group, called Consumer & Online, will be led by Corporate Vice President Darren Huston and will include the Global Advertising Sales and Services organization, led by vice president Bill Shaughnessy.”

The move to centralize, according to sources, has been controversial within the company, since it means all sales are being lumped into one megagroup.

That could all change dramatically again if there is any success in the talks Microsoft has been having with Yahoo (YHOO) about outsourcing its online display sales to the Internet giant. The pair have been discussing partnering over search and advertising.

While such a deal might not happen–Yahoo has been especially reticent to separate its search and display businesses–the two sides have been discussing several scenarios in a bid to compete with online giant Google (GOOG).

Among the latest ideas is one in which Yahoo would take over both search and display advertising sales and Microsoft would run the tech behind the scenes.

Such a deal would be a major shift for both companies in their business focus and would also tether them together.

Microsoft and Yahoo have been busily ferreting away on talks about search and advertising partnership possibilities in what one person close to the situation described as “hot and heavy.”

But exactly how hot and how heavy depends on which side you are talking to, with Yahoo seeking to play it a bit cooler and Microsoft, according to many sources, aggressively interested in striking a deal.

Nonetheless, sources within Yahoo (YHOO) said that the company is also eager to make what could be a lucrative arrangement with Microsoft (MSFT), which could come sooner than some expect.

Yahoo is not likely to talk about its Microsoft discussions when it announces first-quarter earnings tomorrow.

Yahoo and Microsoft spokesmen declined comment after being queried by BoomTown tonight.

But their execs are talking more, nonetheless, said numerous sources.

In fact, several sources said, Microsoft executives–including a key M&A and strategy exec, Charles Songhurst, and digital head Qi Lu–have been in Silicon Valley recently in talks with Yahoo execs.

Li, who used to work at Yahoo as a top tech exec in search before moving to Microsoft, is playing a key role in the discussions, said several sources.

About two weeks ago, BoomTown first reported that the star-crossed pair were trying to make another go at coming together in the business relationship.

Both Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer, I reported, had even met in person in Silicon Valley.

That meeting went well, said many, and several Yahoo sources said a deal could come, especially if Microsoft and Yahoo can settle disputes over a number of issues.

Those include the size of the large revenue guarantee and payment Microsoft would make in exchange for selling Yahoo’s search ads, and perhaps more, related to search.

In that deal, Yahoo might take over sales of display ads for the pair.

Whether the pair can come to an agreement is anyone’s guess, though, given all the drama between the companies over the last 18 months.

Talks between the pair have “flamed in and out,” said many people at both companies, due to a range of thorny items.

Yahoo is very interested in getting a high TAC rate–basically, a payout to Yahoo on each search query–for example, and also wants to make sure it has rights to all the data related to search.

That’s because some within Yahoo are insistent that search and display need to be closely married together and that it would be dangerous for Yahoo to split them up by outsourcing some of that business to Microsoft.

That said, Yahoo could also save enormous amounts of money it spends on search if Microsoft took over some of the business.

Many point to last summer’s botched offer from Microsoft to Yahoo via current Yahoo board member Carl Icahn, who was fighting with Yahoo at the time in a proxy war, as a way to think about various parts of the discussion.

But, warned the sources, the new talks are different and focus intently on keeping Yahoo independent.

In any case, that search deal offer then included:

– $1 billion for Yahoo’s search business and a five-year guarantee of $2.3 billion in search ad revenue, with an option to renew for another five years at a $1.6 billion minimum

– An offer by Microsoft to buy $3.9 billion of Yahoo shares, and lend the company $2.8 billion at a five percent interest rate, by taking over a part of its debt. The money would be used to give a special dividend to shareholders

– An agreement to raise the TAC rate to 85 percent from the former offer of 70 percent, for three years, and to 75 percent after that

That misbegotten and overly complex offer also included a time constraint, a spinoff of Yahoo’s Asian assets and Icahn getting control of Yahoo in the mix, which is ironic since he is now a Yahoo insider.

In other words, a lot of water has flowed under the Yahoo-Microsoft bridge.

It has to, as many think it important that the two are partnered closely together in search and display advertising, even though they still compete on many other fronts in the Internet space.

By joining their forces, they might create a sale that is much more attractive to advertisers and allows for better competition against search powerhouse Google (GOOG).

This is especially true given that Yahoo is the No. 2 player in search, for example, with a much larger share than third-place Microsoft. According to recent surveys, 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 some analysts.

Yes, more layoffs are indeed coming to Yahoo, sources confirmed to BoomTown, but perhaps even more than have been reported.

But that’s not all, as even more top-level managers are either leaving or being moved around the ever-changing organizational structure at Yahoo (YHOO).

That includes a longtime top sales operations exec, Dan Foehner, who is about to start at Facebook next week, as well as others contemplating leaving, on their way out or are being reshuffled.

In other words, business as usual at the tumultuous company, whose nickname should be “Reorg.”

First, the layoffs, which the New York Times was first to report yesterday would be announced Tuesday (side note to Damon–this is how you link to scoops) during Yahoo’s first-quarter earnings call and could impact several hundred employees.

The quarterly results are expected to be weak by most analysts, which is why more layoffs–which had been mentioned by the company as a possibility–are an obvious move.

But several internal sources said Yahoo staff is bracing for employee departures that might to be even higher, as many as 500 or more.

That could mean a complete lopping off or sale of various business units that Yahoo CEO Carol Bartz has been evaluating since she arrived in January.

Why? Well, several employees said they were told the new round of cuts will not actually take place until June and that Yahoo HR is now preparing to follow the rules required by the Worker Adjustment and Retraining Notification Act.

Under the complex federal guidelines, Yahoo must provide a written WARN notice to affected employees “at least 60 calendar days in advance of covered plant closings and mass layoffs.” WARN notices are triggered for a variety of reasons, although a smaller number of layoffs across many units typically does not require it.

A WARN notice is required, for example, when an employer shuts down a facility or operating unit within a single site of employment and lays off at least 50 full-time workers, as well as when an employer lays off 500 or more full-time workers at a single site of employment.

In its last two layoffs, Yahoo issued WARN notices and slashed about 2,500 jobs in total last year, leaving it with about 13,600 employees world-wide at the end of 2008.

But some of Yahoo managers are still leaving on their own.

Many top engineers, for example, have taken jobs of late at Microsoft (MSFT) after the software giant installed a Yahoo tech star, Qi Lu, as its top online exec.

And, BoomTown reported earlier, there have also been numerous departures of key staff recently, including: PR head Jill Nash, Zimbra founder Satish Dharmaraj and soon, high-ranking techie Venkat Panchapakesan.

And more still, it seems.

Yahoo’s VP of Sales Operations Foehner, for example, is headed out after a long stint at the company and is going to Facebook, said several sources inside and outside the company.

On Foehner’s Twitter page, he tweets about a new unnamed job, as well as an athletic endeavor (Foehner is a dedicated triathlete): “back in pleasanton. starting bike adventure on thurs. start new gig on monday. 9 weeks til CdA!”

There is also a lot more movement inside Yahoo, as the reorganization done by Bartz in February shakes out.

Typical of this is Mike Walrath, the high-profile former CEO of Right Media, an online ad exchange snapped up by Yahoo for $720 million in 2007, who is now an advertising-focused SVP at Yahoo.

Now Walrath is moving out from under the purview of Yahoo North America EVP Hilary Schneider and will report to Ari Balogh, EVP of Products and CTO, as all search products seem to be rolling up through his organization. (Both Balogh and Schneider are pictured here.)

While there are other key execs at Yahoo–see this drastically downsized Yahoo management page, which used to be a lot longer–Balogh and Schneider have roughly split the company into two parts, product and engineering for Balogh and the bulk of the content and advertising businesses under Schneider.

Bartz is at the top, of course, and moving parts is not a complete surprise, said one exec, as she gets more control of the company.

“The last reorg was a blunt instrument, so now she is starting to surgically move people around or even out, after seeing what staff can and can’t do and what fat there still is,” said one exec close to the situation.

That’s no small comfort to Yahoo’s reorg-and-layoff-weary staff, especially at its Sunnyvale, Calif., HQ in the heart of Silicon Valley.

When Bartz announced her big reorganization in late February, she declared a moratorium to the endless reorganizations that had plagued the company’s troops for far too many years.

Wrote Bartz in an email to Yahoo employees about her new management lineup:

“I know you guys have reorg fatigue. Hang in there–our intention is to leave this structure in place for two to four years. We’ll continue to make adjustments as needed, but we expect this core structure to stay put.”

Perhaps the core is still solid, but a lot is still quite undefined at Yahoo, as it seeks to right its shaky fortunes.