Feeling like a politely worded episode out of the 1960’s cult classic “Yippee, Yappee and Yahooey”, where three gallant heroes battle a fire breathing dragon among other villains, Yahoo has responded to Microsoft’s “unsolicited” bid to acquire Yahoo (as in takeover) with a  battle of words. Microsoft Chief executive Steve Ballmer and Yahoo! CEO Jerry Yang are dueling in language as the heated letters between the two giants were released earlier today.

The battle for the dragon began last year as Microsoft prepped it’s employees to get ready for an acquisition of Yahoo, and was followed up by a US $44 billion “offer” two months ago to buy the company.

Microsoft’s “offer” to purchase letter was accompanied with the suggestion that Yahoo! is losing value, market, and page views along with the threat to get hostile with a proxy fight unless Yahoo agrees to the deal within three weeks.

Yahoo! fired back today, highlighting it’s value and future growth prospects, along with it’s investments as strategic benefits to Microsoft, and placed a stake in the ground with the news that stockholders have deemed the bid seriously undervalues Yahoo!. Yang was careful to note that future transactions are not out of the picture, as long as the price goes up to satisfy stockholders.

March Hitwise results show that Google has 67.25% of the search market, (and growing monthly) with Yahoo at 20.29% (and declining) and MSN also slipping at 6.65%.  If MSN can combine with Yahoo they can at least gain leverage as a #2 with more power in the search market share, where as right now Google’s complete domination seems set in stone. The question is whether stockholders will be more open to Microsoft’s offer if Google continues to grow, putting further pinch on Yahoo! to make a change, any change.

Ballmer will likely grant a counter offer to Yahoo! quickly, since they set a proxy deadline that demands some kind of answer or response from both sides.  Corporate relations are rarely sweetened by thumping the prospective acquisition over the head with a club and dragging her back to the cave, the new acquisition might dutifully take care of business but with less heart, and Yahoo! is a company known to be strong of heart. Critical Yahoo! employees may flee if negotiations turn into a proxy fight.

Ok, now for the good stuff. Here is a compilation of all the latest, including letters between Yang and Ballmer. We’ll be posting new updates as they break.