Feb. 27 (Bloomberg) -- Yahoo! Inc., the Internet company that rejected a $44.6 billion takeover bid from Microsoft Corp., said its suitor's advances are distracting management and may require ``significant'' time and resources to review.

The offer, announced Feb. 1, also has created uncertainty for employees, which may make it difficult to keep and hire new people, Sunnyvale, California-based Yahoo said today in its annual report.

Yahoo, owner of the second most popular Internet search engine, rebuffed Microsoft's offer Feb. 11, saying it ``substantially undervalues'' the company. Microsoft's $31-a- share bid was 62 percent higher than the stock's closing price the previous day and followed a two-year stretch during which Yahoo lost about half its market value.

``It's sort of galling that they're calling something that moved the stock from the $19 level to a $31 offer as a distraction and not in the interest of the company,'' said David Katz, who helps oversee $1.6 billion in assets, including Yahoo and Microsoft shares, at Matrix Asset Advisers in New York. He expects Microsoft to raise its per-share bid to as much as $35.

Yahoo and its board have been named in seven shareholder lawsuits, which ``may become time consuming and expensive,'' the company said today in its filing with the U.S. Securities and Exchange Commission.

Detroit Suit

The Police and Fire Retirement System of the City of Detroit sued Yahoo last week, claiming the company is ``pursuing all manner of value-destructive third-party deals'' while resisting Microsoft. Yahoo has held talks with companies such as News Corp. about partnerships. It hasn't disclosed how these deals would allow it to remain independent and compete with rival Google Inc.

``As a result of Microsoft's unsolicited acquisition proposal, and speculation concerning a potential acquisition, the future trading of our common stock is likely to be volatile,'' Yahoo said. ``There can be no assurance whether a transaction will occur or at what price.''

Yahoo rose 15 cents to $28.37 at 4 p.m. New York time on the Nasdaq Stock Market. The stock has jumped 48 percent since the bid.

After Yahoo's rejection of its offer, Microsoft said it may take the bid to shareholders. A person familiar with the matter said this month that Microsoft may seek to oust Yahoo directors, who are up for re-election at the next annual meeting. The last meeting was in June.

Microsoft, based in Redmond, Washington, is the world's largest software maker.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: February 27, 2008 18:06 EST