Yahoo! reported an 18 percent drop in second-quarter profits on Tuesday putting more pressure on the company in the aftermath of a shareholder revolt and the controversy over Microsoft's aborted attempt to buy the company.

The Silicon Valley internet services company said it earned $131.2 million, or 9 cents a share, compared to $161 million, or 11 cents a share a year ago. Revenue for the three months ended June 30, 2008 was $1.8 billion, compared with $1.7 billion in the same quarter a year earlier.

Analysts said the company was hit by the slowing economy which reduced internet advertising, and on increased spending to improve its search business. Yahoo! founder and CEO Jerry Yang said the fruits of those investments would soon become apparent.

"Yahoo! is executing against its strategy, and we believe is well positioned for long-term growth and maximizing stockholder value," Yang said in a statement.

"We are seeing validation that we have the right strategy as we continue to make transformational investments that position us to take advantage of pivotal trends driving growth on the Internet,” he said.

Yahoo released the results a day after announcing a settlement with corporate raider Carl Icahn, who had been trying to oust the board and revive the company's sale to Microsoft.

Microsoft had tendered a $47.5 billion bid for the company, but withdrew the offer after Yahoo! demanded a higher price. Under the agreement with Icahn, Yahoo! agreed to expand the board by two members and give Icahn's representatives up to three seats on the board.