Yahoo is racing to forge a credible alternative that lets it stay independent or at least forces Microsoft to raise its $31 a share cash-and-stock bid, now valued at $42.8 billion.

When it reports first-quarter results on Tuesday, Yahoo has perhaps a last chance to demonstrate some financial strength and progress it has made in stabilising the company’s internet media and advertising business after two years of decline.

Proxy battle

Mid-week, Yahoo is set to complete a test with Google Inc on whether Google should run a piece of its web search ad sales, a move sources familiar with the talks say is part of a plan to merge with Time Warner’s AOL and fend off Microsoft.

Time runs out by Saturday, the date Microsoft has set for Yahoo to accept the deal or face a drawn-out proxy battle by Microsoft to unseat Yahoo’s board. Two weeks ago the software giant threatened to lower its offer if Yahoo did not conclude friendly merger talks with Microsoft by April 26th.

Yahoo’s Chief Technology Officer will use a speech on Thursday at the Web 2.0 expo industry show to spell out a strategy to open up Yahoo services such as e-mail, news, sports and advertising to make them more relevant across the web, not just for users drawn inside its own sites.

Interestingly, that same day, Microsoft reports its own quarterly results. It is expected to show strong underlying fundamentals across its range of businesses.

But despite mounting time pressures — and veiled threats by Microsoft to walk away from the deal if it drags on — Wall Street analysts say they expect neither side to blink. Meanwhile, some argue that Microsoft’s pressure tactics could backfire and spoil hope of Yahoo’s board agreeing to a deal.

But if the two do not reach a deal this week, the stand-off could drag on for months. Yahoo has until mid- July to hold its annual shareholder meeting where Microsoft could propose its own slate of directors.