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Yahoo revealed that it was distracted by Microsoft's take-over bid, warning investors that the $41.6 million offer was affecting management and employees.
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Yahoo made the comments in its annual report to the U.S. Securities and Exchange Commission (SEC).
The comments came shortly after Yahoo's board of directors rejected Microsoft's offer, earlier this month.
In response to Yahoo's statement, Microsoft said its offer is full and fair, and that it has raised the prospect of a campaign to elect a rival slate of directors that would back its offer.
"The review and consideration of the Microsoft proposal and any alternate proposals, have been, and may continue to be significant distraction for our management and employees," said Yahoo, in its report to the SEC.
"Consideration of these proposals have required and may continue to require, the expenditure of significant time and resources by us," added Yahoo in its annual report.
Yahoo admitted that it is more likely to face seven shareholder lawsuits over its handling of Microsoft's buyout proposal, four of which were filed in California state court and three were filed in Delaware Chancery court.
Microsoft's offer, which represented about 62 percent of Yahoo's share price when it was announced in February 1, was rejected by the Silicon Valley Web giant saying it significantly undervalued the company's audience, advertising platform and investment holdings.
Yahoo also concluded that Microsoft's bid had an adverse effect on its Internet business and advertising partners.
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