Fourth quarter profits fell by more than 23% to $206m, down from $269m during the same period a year ago.
For the full year, the internet giant reported lacklustre profits of $660m or 47 cents per share, down from $751m or 52 cents per share in 2006.
However, its revenues climbed 8% from $6.4bn in 2006 to $7.0bn in 2007.
Jerry Yang, co-founder and chief executive officer of Yahoo!, warned of tough times ahead but said the business was seeking to make necessary investments that will help the company gain a "significant piece" of the growing ad market.
He said: "Looking to 2008, we are taking an aggressive investment posture. We're making profound, fundamental changes to virtually all aspects of our business.
"While we will continue to face headwinds this year, we believe that the moves we are making will help us exit 2008 stronger and more competitive and return to higher levels of operating cash flow growth in 2009."
The company added that it had revised a deal with US phone company AT&T, which will cut into revenue this year. However, the restructuring will lead to better cash flow in 2009.
Yahoo!'s share price dropped 11% to $18.56 in the US after market trading yesterday. This followed the company's confirmation of plans to shed 1,000 jobs, as it continues to suffer in the face of strong competition from rival Google. Specific job cut details will not be announced until mid-February.
Yahoo! said it will take a charge of $20m to $25m against first-quarter earnings to cover the job cuts.
Yahoo! said that its marketing services revenues, which include advertising, were $1.5bn up 7% on last year.
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