Yahoo CEO Jerry Yang and President Sue Decker were on stage at the D6 conference in Carlsbad this afternoon.

First questions from Walt Mossberg: “Where do you stand with the Microsoft negotiations?”

Yang’s answer: “Microsoft is no longer interested in buying the company. They want to talk about other things, and we’re listening.”

Yang says that Microsoft was very hostile during the negotiations, and that Yahoo was open to doing a deal from day one. “There needed to be the right circumstances” he said, referring to deal price, timing, regulatory issues and other terms. “I didn’t feel like we had a deal even if we could have agreed on price.”

On the rumors about how the deal broke apart: “It’s like when you break up with your girlfriend,” he says, “pretty quickly its he said/she said.”

Mossberg: Why would you want to outsource your search advertising to Google?”

Yang: “We feel very strongly about our ability to monetize search. There’s a value gap between us and the market leader.” He says the test with Google gave them an understanding of how effectively Google could monetize Yahoo’s inventory.

“I like Google” Yang said.

Yahoo has an ability to remain very competitive in the advertising space, he said, and added that the market doesn’t fully understand their potential.

Mossberg: Yahoo and Microsoft have been losing search market share, and Google is in danger of becoming a monopoly (see my thoughts here).

Yang: Panama helped us begin to close the gap with Google on monetization, and there is growth in queries. He says they have to innovate and become more open to compete further. They will become much more aggressive over time, he says.

Mossberg pushed hard on the question of how Yahoo can compete.

Decker: Our turnover rate hasn’t changed much during the process. It’s been harder to hire as people are unsure of Yahoo’s future. New display ad product coming out in Q3, there’s a bright future. “We have the chance of a lifetime to show what Yahoo can do with unbelievable assets.”

Yang: Says he went to a board meeting for a different company recently, and that it was like walking into his own wake as people asked him if he was ok. “The perception of us as a company just isn’t accurate,” he says. We’re pulling our leadership team together, in crisis management mode. We are at the center of attention, he says, and we need to execute. “We can’t be more clear that Yahoo is going through a period of time last year where they were transitioning the business. The essence of Yahoo has been defined over the last few months that make us a lot stronger. The people joining us today are joining us for the right reasons.”

[my note: he's talking sound bites, no coherent message. Body language of both Yang and Decker is beleaguered.]

Mossberg: “What is the business of Yahoo?” Search, IM, advertising, consumer, email?

Yang: I think of yahoo as we have to be incredibly relevant and meaningful to consumers. we want you to start your day at yahoo - home page, mail, search, mobile. We want people to come to Yahoo first thing in the day and multiple times per day. It happens to be a position we have occupied for much of our history. We can’t be all things to all people. We have become much more focused. A past challenge has been how to develop every vertical.

Decker: We still do hundreds of things but we focus on homepage, search, mail and mobile. It’s how we get our insights, how we get our advertising strategy. We’re trying to pull focus back into those core areas.

Mossberg: Who do you want to focus on?

Yang: We reach 70% of the Internet, over half a billion people per month. Yahoo is a very powerful company, there’s no question about it. We need to continue to be relevant to those people as they grow up on the internet. That’s why mobile is so important to us.

Talks about social apps on the Yahoo home page, need to reach out to developers.

Final thoughts on Microsoft deal: “We didn’t walk away from Microsoft deal, they did.”