The internet giant's profits fell from $161 million to $131m in the three months to June 2008, according to its latest figures.
Yahoo! claims the worsening economic conditions have eroded expenditure on display advertising, particularly in the finance and packaged consumer goods sectors.
The company has been subject to a takeover bid from Microsoft, which offered $47.5 billion to acquire it.
Yahoo! spent $22m on advisors and lawyers to fend off the bid.
Earlier this week Yahoo! struck a deal with rebel shareholder Carl Icahn, who was attempting to replace the company's entire board at next month's annual general meeting.
Icahn and two of his appointees have been given seats on an enlarged board.
Yahoo! founder Jerry Yang said the period had been challenging for employees but people had "remained remarkably focused" during the takeover battle.
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