The stock market is taking it on the chin Friday as AIG's gaping loss has put the financial sector back in a harsh spotlight. But beneath the gloomy surface some tech stocks are shining, most notably Priceline.com and Activision.

Priceline.com reported first-quarter earnings of 76 cents per share vs. the consensus estimate of 60 cents. The company said it expects full-year 2008 EPS of $5.25 to $5.65 per share vs. the analysts' consensus of $5.12.

Priceline shares are soaring Friday as the online travel firm continues its long comeback from the depths of the post-2000 tech bust.

Separately, Activision reported fiscal fourth-quarter earnings of 14 cents per share vs. the consensus forecast of just 5 cents as its "Guitar Hero" and "Call of Duty" franchises continued to perform well.

Cowen & Co. and Kaufman Brothers upgraded Activision in the wake of their results, and the shares were responding accordingly.

Take-Two shares, meanwhile, have barely budged this week despite huge first-week sales for Grand Theft Auto IV, suggesting Electronic Arts may not need to raise its bid after all.

Is Microsoft giving Yahoo a face-saving way to come back to the negotiating table? That's one interpretation of Microsoft's latest statements and decision to dismantle is proxy board slate. It's also a plausible explanation for why Yahoo shares have been so surprisingly strong this week.

Overnight, Bill Gates reiterated his prior comments about how Microsoft is now " focused on its independent strategy," but he didn't totally rule out a deal. Neither did chief strategy officer Craig Mundie, whose comments yesterday included plenty of wiggle room, as Henry Blodget writes.

"Yahoo could always come back again and say please buy us for $33 (a share) and I'm sure we might reconsider it, but we're not assuming that's going to happen," Mundie said.

The bottom line is the ball is in Yahoo's court, as Henry and I discussed earlier this week -- and Microsoft is signaling it would be receptive to negotiations.

Also, Microsoft's decision to release members of the proxy board slate from their obligations could be viewed as a sign the company isn't planning a hostile offering -- not that it's totally ruled out doing a deal (period).

Meanwhile, Sergey Brin made some effusive comments about Yahoo yesterday, saying Google remains open to doing an outsourcing deal, refuting rumors to the contrary. On another level, Brin is helping Tech Ticker's parent maintain some leverage on the chance Yahoo chooses to revive negotiations with Google's archenemy, Microsoft.

From Silicon Alley Insider, May 9, 2008:

The most pressing question for Google (GOOG) shareholders is what product will drive the company's next growth boom as the search product cycle ends. Most likely candidate? Not sexy mobile or video. Just boring old display ads.

Google has been serving display ads on other sites for years, and the DoubleClick acquisition will accelerate that effort. Third-party display ads will only make a small contribution to the bottom line, however (10-20 cents on the dollar). So the key question here has been whether Google would deign to put display ads on its own sites.

In another sign it has "moved on" from Yahoo (at least for now), Microsoft has released members of its potential proxy board slate from their obligations, The Wall Street Journal reports.

The action follows a string of comments from Microsoft executives indicating Saturday's decision to walk away wasn't a negotiating tactic, including these Thursday from Microsoft's Chief Research and Strategy Officer Craig Mundie: "The market may wish that the Yahoo deal may come back together, but Microsoft at least at this point assumes it's over," Reuters reports.

Mundie did leave the door open a crack, adding: "Yahoo could always come back again and say please buy us for $33 (a share) and I'm sure we might reconsider it but we're not assuming that's going to happen."

Despite speculation big shareholders like Capital Research & Management and/or Legg Mason would push Yahoo to go back to the negotiating table, Wall Street is also moving on.

After suspending coverage during the negotiations -- to avoid conflicts of interest -- Yahoo M&A advisors Goldman Sachs and Lehman Brothers have reinstated coverage on Tech Ticker's parent, Dealbook reports.

Then again, Yahoo shares were up another 2.3% to $26.22 Thursday, meaning optimistic traders either smell another deal or are whistling past the graveyard.

The press is abuzz with speculation that Microsoft may be making a bid for Facebook, a deal Henry Blodget loves. And it's easy to see why Microsoft would, too. But my money says Facebook still doesn't sell.

The wild card for future negotiations will be Facebook's board. Right now, the board consists of just Facebook CEO Mark Zuckerberg and investors Peter Thiel and Jim Breyer, and Zuckerberg controls three seats. The fourth member could have a pivotal vote in any future acquisitions. And if you're a Facebook bull, rumors that Marc Andreessen may be joining the board are good news.

A few days ago, Henry Blodget said he "wouldn't wish newspaper stocks on my worst enemy."

Meanwhile, former New York Times executive editor Howell Raines wonders if newspapers aren't "the worst investment in America."

But it takes two to tango, and Todd Harrison, founder and CEO of Minyanville.com, is taking the other side of the conventional wisdom about newspaper stocks.

Harrison, a former trader at Cramer Berkowitz, Morgan Stanley, and Galleon Group, has long positions in Gannett and McClatchy, two publishing giants whose shares have tumbled dramatically in recent years.

But Harrison believes the stocks have now priced in what everyone knows -- that newspapers are a dying business, in large part because of the Internet. But Harrison's bull case is that the newspaper sector isn't priced for the possibility that -- if "content is king" -- Internet giants like Microsoft and Google might seek to acquire these (or other) bastions of old-school journalism.

Despite Microsoft's "we've moved on" declarations and reports Google might be less enthusiastic about an ad search deal, Yahoo "trades like there's something else in the works," says Todd Harrison, founder and CEO of Minyanville.com.

Like many, Harrison was surprised Yahoo didn't fall further Monday and more surprised the stock has continued to rally, trading well above $26 per share intraday Thursday.

A former trader at Cramer Berkowitz, Morgan Stanley, and Galleon Group, Harrison says Yahoo's strength this week is an indicator of traders' betting on the deal being resuscitated. As for Microsoft, even if the software giant really is no longer interested in Yahoo, the stock's lackluster performance could be a sign the software giant is going to seek other ways to spend $45 billion. There's rumblings about a Microsoft bid for Facebook, but don't discount the potential for a big share buyback, which will give the ailing stock a boost, Harrison says.

From All Things Digital, May 7, 2008:

Project Granola?

Apparently, that’s the jokey nickname that’s been given by some in the company to Microsoft’s (MSFT) new online strategy, in the wake of its failed efforts to acquire Yahoo (YHOO) that ended in a big heap of mess this past weekend.

Now, sources tell BoomTown, it is all about “organic” -- hence the image of a healthy handful of granola (except for the fact that, in my experience, nobody really likes granola after eating it as much as they think will before).

In any case, it is a word Microsoft folks have been slipping into the conversations with BoomTown over the past few days, so much so that I have started to feel like I was talking to execs from Whole Foods.

Now Microsoft’s greenness has gone public.

Updated from 10:47 a.m. EDT

With rumors Jerry Yang is being "benched" and Roy Bostock will now head Yahoo's effort to get Microsoft back to the negotiating table, a few things are clear:

• Bostock, Yahoo's chairman, should have been leading the effort from the get-go, and should have been at the infamous Seattle Airport meeting where the deal broke down.
• If "we're walking away" was a negotiating ploy by Microsoft, it has worked like a charm.

The problem for those buying Yahoo stock on hopes for a revival of negotiations (or a big Google outsourcing pact) is that walking away doesn't appear to be a negotiating tactic.

From Steve Ballmer's "clearly a deal is not meant to be" comment Saturday to Bill Gates' comments Monday on Fox Business News, the message from Microsoft is clear: "We've moved on," as Windows Live GM Brian Hall put it on Tuesday.

Update: In Tokyo Wednesday, Gates added: "Now at this point Microsoft is focused on its independent strategy."

Taking that message at face value, there really appears to be only one way for Yang, Bostock, and their M&A advisors to get Microsoft back to the negotiating table: Deliver Yahoo to Ballmer on a silver platter, with assurance of talent retention, regulatory assurances, and a deal price tied to performance targets.

In other words, Yahoo needs to do a 180-degree turn from its prior negotiating tactic of "any deal but Microsoft."

Barring that, expect some major fireworks at Yahoo's July 3 shareholder meeting.

With Yahoo under pressure from major shareholders and senior management backpedaling, maybe a deal with Microsoft isn't dead after all.

At least, that's how many traders are seeing things: Yahoo shares closed well off their session lows Monday and are rallying Tuesday, while Microsoft stock struggles to get above $30.

But those betting Microsoft will come back to the table soon are assuming Steve Ballmer's "bye-bye" letter Saturday was a negotiating tactic vs. a true change of heart.

Yahoo's PR team is trying to paint Ballmer as having "suddenly" changed his mind about the Yahoo bid. But as Henry Blodget writes, the truth is his position evolved over the three months when Yahoo seemed to indicate it would prefer any alternative to a deal and Microsoft's own employees and shareholders expressed major reservations.

Meanwhile, one of Yahoo's best "alternatives" was the outsourcing deal with Google, which Citigroup's Mark Mahaney estimates could generate as much as $1 billion of additional cash flow to Yahoo annually.

Mahaney's $1 billion target has been widely quoted but Sue Decker says Yahoo isn't giving up on search or display, suggesting a more limited outsourcing agreement -- and, therefore, considerably less than a $1 billion bump for Tech Ticker's parent.

In other words, Yahoo bulls may be in for a rude awakening on two fronts.