Terry Semel took his glasses off, then he put them on again. Then he took them off. On again. Off. On, off. On.

He paced the stage. He paused to regard the crowd. About 150 people were out there, taking their seats. They looked pretty glum.

The colors didn't help. At Yahoo, which Semel runs as chairman and chief executive officer, the corporate color is purple. Here in this small banquet hall in Santa Clara, California, the bunting was purple, the draperies were purple, and the table skirts were purple too. The signs were purple, as were the balloons and the mood lighting. The thick, pleated curtain hanging behind Semel, however, was inky black, a kind of theatrical frame for the C.E.O., whose performance at this, the company's 2007 annual meeting, would later be webcast.

Perhaps a video would lighten the room's unfortunate funereal look. The one that Semel started up showed edgy but squeaky-clean young people performing odd but well-timed body movements to a sanitary, unthreatening hip-hop beat. At regular intervals, the video promoted Yahoo's many services. In one segment, close-ups of the 64-year-old Semel showed him being a good sport, attempting the Yahoo yodel.

The real Semel grinned, amused at his televised image. The older members of the company's board of directors, men in dark suits, sat squeezed shoulder to shoulder in a tight row of chairs, stone-faced. The attendees—shareholders, executives, members of the press—remained expressionless.

Well, that didn't work. And what could? These are dark days for Yahoo. Once one of the internet's highest flyers, the company has fallen so far behind Google, and social networks such as MySpace and Facebook are coming up so fast from behind, that shareholders and industry analysts are already talking about Semel's replacement.

Semel's expression soured when Eric Jackson, owner of 96 shares, approached the microphone. Jackson had used a blog and YouTube video to unite 100 investors, holding 2 million shares, in a pledge to vote against reappointing Semel and seven other directors to the board.

Two million is less than 1 percent of Yahoo's outstanding shares, but Jackson's grassroots quest attracted media attention, and one-third of the votes were cast against at least one of the directors. A 66 percent support level is a landslide in politics, but at a public corporation, where nearly 100 percent is the norm, it is an embarrassment of the highest order.

The dissident Jackson asked a series of impertinent questions: Does Semel still have fire in the belly? Is he okay with settling for second place behind Google? And shouldn't he have apologized to shareholders for his performance over the last two or three years? Semel accused Jackson of being "cute." Eventually, Semel became so defensive that he declared, "I feel very good about my capabilities."

Semel would not talk to Condé Nast Portfolio, nor would any other top executive at the company. A Yahoo spokesperson says, "Terry has no intention of leaving the company." And why should he? Yahoo's board of directors has lavished Semel with enormous wealth. Since he started on the job in May 2001, his total compensation has totaled more than half a billion dollars. That's billion with a b.

Last year alone, he was paid $107 million, or 14.3 percent of the company's net income, making him one of the highest-paid C.E.O.'s in the U.S. He's set to receive 6 million options worth $92 million in Yahoo stock through 2008 in a retention incentive granted by the board of directors last year. That is not the kind of pay package cooked up by a compensation committee that's thinking about replacing someone.

Yahoo has lost to Google in every way it possibly could. Google search is crushing Yahoo in market share. The company fell years behind Google in Web-advertising technology. And the bleakest statistic: Google had $10.6 billion in revenue last year, most of it in advertising, compared with Yahoo's $6.4 billion. When Semel took charge of Yahoo in 2001, Google was still a bit player.

Now social-networking sites like MySpace and Facebook are grabbing away Yahoo users and advertisers, and analysts say that average time spent on Yahoo is declining. Workers inside Yahoo describe it as a bureacratic mess that a reorganization in December has thus far not straightened out.

Employees are fleeing. Over the past year, eight of the company's top 26 executives have up and left. Some were shoved out in the reorganization, but others have quit. The company's top technology officer, Farzad Nazem, "retired" in June. More worrisome has been the diaspora of talent a level or two down. Departures from those ranks have included music chief Dave Goldberg, head of the consumer search business Andrew Braccia, and Yahoo HotJobs general manager Dan Finnigan.

Dozens of refugees have set up camp at Google, Microsoft, and Facebook and at venture capital firms such as Benchmark, Sequoia, and Accel Partners. Others are starting new companies.

Fearful of their futures, many Yahoo employees were not willing to talk about the company on the record. They're worried getting laid off, and for good reason. Semel has finally acknowledged a surfeit of duplicate projects at Yahoo and an intention to cut them back. Revenue per employee at Google last year was $1.3 million; at Yahoo, $606,000.

Perhaps all this turmoil explains the dissident shareholders' problems with Semel. To his cheerleaders, the 325 percent run-up in Yahoo stock in 2003 and 2004 justifies his worth. To detractors, Semel was just lucky, and the miserable drop in Yahoo's stock price since then is a better indicator of his talent.

It's impossible to know how much of Semel's early success resulted from the considerable recovery in internet advertising during that period and how much came from executive brilliance. There is little debate, however, that someone at the company has been asleep at the wheel for at least the last two years, and the question now is whether Semel can rouse the company from its self-induced torpor.

The company's future and Semel's legacy now rest on the shoulders of a woman named Sue Decker, who's in charge of advertising and publishing and reports directly to Semel. To put it simply, she now has the responsibility of bringing boatloads of revenue to Yahoo.

Previously the company's chief financial officer, she is described by one recent Yahoo renegade as the "voice of the analytical side of Yahoo screaming out to take control." Decker is also widely regarded as Semel's heir apparent, although the company has taken no position on the matter.

Decker landed in a sweeter position than anyone after December's reorganization, which she helped plan. Out the door went the chief operating officer along with Lloyd Braun, a former TV executive whom Semel hired to bring Hollywood-style content to Yahoo, the results of which were mixed at best: The flashiest product of Braun's Hollywood group is The 9, a quick video countdown of funny things whose quality is best left for viewers to judge.

Braun's detractors say he was too Hollywood abrasive for Yahoo's consenus culture. His supporters say Braun never got the support he needed: not enough money, not enough engineering time, not enough help from Semel when traditional Yahoos resisted his push for change.

The reorganization came on the heels of a Yahoo executive's memo, now famously known in Silicon Valley as the Peanut Butter Manifesto, that called for drastic action in the face of dismal Yahoo performance and a tendency to spread talent and resources over too many projects, like a dab of peanut butter over a lot of toast.

The shakeup didn't do much to pacify critics, however. So Semel announced a new strategic plan: Focus on customers. But little sense of urgency accompanied that plan. After Braun left the Hollywood group at Yahoo's Santa Monica offices, the place remained leaderless for four months before a Semel protégé, Jeff Weiner, was put in charge.

Yahoo is divided into three groups—advertising, audience, and technology—but the company still has not named a head of the audience group.

Anyone put in charge of content will face problems, says Ellen Siminoff, a former Yahoo executive who's now C.E.O. of a company called Efficient Frontier. "Yahoo has some challenges," she says. "They need to come out with a new product. I don't know what product it would be. They have to come out with something other people haven't."

Whether or not someone's leading the audience group, Decker will be the one who determines the company's future in the near term and possibly in the long term as well. Without a significant boost in advertising revenue at Yahoo, nothing else matters.

So far, Decker has succeeded in getting the advertising-technology system back on track, and even before the reorganization, she had struck two major deals: an exclusive arrangement to sell advertising for eBay and an agreement to share content and online-advertising revenue with a large group of newspaper publishers.

Decker keeps a low profile, but she's a businesswoman on her way up, and not just at Yahoo. This former analyst at Donaldson, Lufkin & Jenrette is tough in a spunky Jodie Foster kind of way. She serves on boards of several top-flight companies, including Intel and Costco. In May, she was elected to the board of Berkshire Hathaway. "She's a rising star," gushes fellow Costco board member John Meisenbach.

Tony James, vice chairman of the Blackstone Group, Costco board member, and Decker's former boss, is equally effusive: "Is she C.E.O. material? Definitely. She's tough-minded. At D.L.J., she managed a big group of prima donnas."

But for all the adulation, whether Decker has the creative vision and technical chops to lead Yahoo remains a big question. She'll have help on the numbers side from an old family friend, Blake Jorgensen, who came from the investment bank Thomas Weisel Partners in June to replace Decker as C.F.O.

He was the best man at Decker's wedding and a Stanford classmate of Decker's husband, Michael Dovey. (Dovey and Decker met at Harvard Business School.) Dovey told friends he'd get rich by 40 and retire, which he did, thanks to a job at Goldman Sachs. Now he takes primary care of the couple's three kids.

With all the financial talent at her beck and call, Decker surely realizes just how deep Yahoo's problems are. It's no coincidence that Yahoo's stock price began declining just after Google went public (and transparent) in 2004. Once Google started filing documents with the Securities and Exchange Commission, investors could see just how hard Yahoo was being hit.

Yahoo's investment problems go much deeper than its stock price. Under a method of business valuation known as "economic value added," which is used by such firms as Goldman Sachs and McKinsey & Co. and which people like James, Jorgensen, Dovey, and Decker would be familiar with, Yahoo has been destroying shareholder value every year since its creation.

E.V.A. measures not only a company's return on capital; it puts a premium on a stock's risk. To earn positive returns in E.V.A., a company must top the return it would have achieved by investing in a basket of stocks with similar risk. Otherwise, why have a company at all?

According to EVA Dimensions in Locust Valley, New York, companies like General Electric and Microsoft have been E.V.A.-positive since 1989, as far as EVA Dimensions' records go back; Google and Costco have been E.V.A.-positive for their entire existence; eBay went E.V.A.-positive in 2002 and Amazon in 2003, and the economic return on both companies has been rising since. Yahoo had one good year, 1998. Otherwise, the company returned no economic value in any year.

If Decker succeeds in getting Yahoo back on track, she can look forward to a future of unlimited potential. At this point, Semel's star is so tarnished that Decker is likely to get credit for any victories, while if things don't work out, Semel will take the blame. But with a rich contract that runs through 2008, a compliant board of directors, and half a billion dollars in the bank, with more on the way, why should Semel care?