Yahoo (YHOO)'s CEO Jerry Yang is in trouble.  When Microsoft (MSFT)'s CEO Steve Ballmer ruled out another bid for the search giant, he sent a message to Yahoo's board of directors: your management is incompetent.

Yahoo Chief Executive Jerry Yang said at an industry conference that Microsoft's best option was to buy his company and Yahoo is still willing to sell the company.  Mr. Yang's remarks came after Google (GOOG) Inc. backed out of a search-advertising partnership with Yahoo to avoid a challenge from the U.S. Justice Department, which said it would sue to block the deal to preserve competition in Internet advertising. Yahoo had been counting on the Google deal to boost its finances and placate shareholders still incensed by management's decision to reject the $33-a-share takeover bid from Microsoft six months ago.

Mr. Ballmer also said: "I'm sure there are still opportunities for some kind of partnership on search. I think an acquisition is a thing of the past."

What this means is simple: Ballmer believes Yahoo has become desperate, and who would know better than CEO Jerry Yang.  Microsoft will want to make a partnership deal with Yahoo, but on entirely their own terms.  It is a sad turn of events for shareholders who had seen $30 earlier this year and maybe even moreso for long term shareholders who had seen $100 plus.

Yang has clearly laid down his cards, signaling that Yahoo needs a major partnership.  But with little leverage, his suggestion that Microsoft come back to the table is, at best, incompetent public relations.

What will become of all this?  Look for Microsoft and Yahoo to eventually make a search deal that is in Microsoft's favor.  Yahoo shareholders, as always, will get the short end of the stick.

What will become of Yang?  I don't know exactly.  Somebody needs to ask Carl Icahn.  He'll know.