When Microsoft made its massive bid for Yahoo earlier this month, CEO Jerry Yang was extremely worried about the impact it could have on his floundering business. With a stagnant stock price and internal issues to boot, Yang believed Microsoft's offer could throw the company off-track.

And while all those issues were well-founded, not even Jerry Yang seemed prepared for the immense upswing in employee distraction the deal has caused.

Where are all the good workers?

"The review and consideration of the Microsoft proposal...have been, and may continue to be, a significant distraction for our management and employees," Yahoo said in the company's annual report filed with the US Securities and Exchange Commission. 

Yahoo warned that the deal "may adversely affect [its] business".

According to Yahoo, Microsoft's bid has hindered the its ability to attract prospective employees. Even members of its current workforce are looking for ways out before Microsoft makes its move and attempts to strike a deal with the online firm. 

To make matters worse, as Yang continues to point out, his company is in a restructuring phase. It is doing all it can to react more adeptly to Google's online salvos.

It seems Yahoo is fighting an uphill battle that it will be hard-pressed to win. After all, if it cannot control its employees' emotions or Microsoft's attempts at a proxy fight, what more can Jerry Yang and company do other than wait for their flotilla to enter Steve Ballmer's territory with a raised white flag?