The search company's rejection came on the heels of Microsoft's weekend letter that threatened to lower its buyout offer and take the matter straight to Yahoo shareholders, a hostile move to which Yahoo issued an aggressive response.

The latest twist in the technology drama began Saturday and looks to continue throughout the month as the battle advances to a head on April 26.

Microsoft: Sell or Else

Microsoft CEO Steve Ballmer sent what amounts to an ultimatum letter to Yahoo's board of directors on Saturday. The letter made clear that Microsoft's goal with making "such a generous offer" was to create the basis for a speedy and ultimately friendly transaction. Microsoft is not pleased that two months have gone by and the deal has not moved forward.

Ballmer wanted Yahoo to authorize a team to negotiate and come to a definitive agreement on a merger. Ballmer then threw down the gauntlet: a three-week deadline to come to a conclusive agreement -- or else.

"It is unfortunate that by choosing not to enter into substantive negotiations with us, you have failed to give due consideration to a transaction that has tremendous benefits for Yahoo's shareholders and employees," Ballmer wrote. "We think it is critically important not to let this window of opportunity pass."

Yahoo: Don't Threaten Us!

In a lengthy joint letter, Yahoo Chairman Roy Bostock and CEO Jerry Yang reiterated the company's initial position: The merger is not in the best interest of Yahoo or its stockholders. The duo noted the company has laid out a three-year strategic plan and continued to launch new products since Microsoft's unsolicited offer in February.

"Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo," the statement said. "Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal."

The duo said Yahoo considers Microsoft's ultimatum a threat that is counterproductive and inconsistent with its stated objective of a friendly transaction. Then Yahoo restated its position "so there can be no confusion." Yahoo is open to all alternatives that maximize stockholder value and will not allow anyone to acquire the company for less than its full value.

Taking the Battle to the Next Level

On one level Yahoo is covering itself by saying it's worth more than Microsoft has offered. There are some arguments to be made, detailed in the letter sent Monday, to support that position, according to Greg Sterling, principal analyst at Sterling Market Intelligence.

Yahoo also seems to be restating its desire to remain independent with the reiteration that it continues to explore alternatives to Microsoft, Sterling said, but there is a conciliatory dimension to the letter, expressing a willingness to be acquired if the price is right.

"It's hard to know if the tone of these missives is an accurate reflection of what's going on behind the scenes or whether these are public positions that belie more earnest discussions in private," Sterling concluded. "It would seem all of this is coming to a head, however, with Microsoft's threat to initiate a proxy fight -- already under way -- if Yahoo doesn't accept by April 26."