Yahoo beat Wall Street expectations and raised its forecasts, but failed to produce the blow-out quarter that might force a rethink of Microsoft’s takeover offer, currently valued at $43bn (£22bn).

The internet company reported first-quarter revenues of $1.35bn and earnings per share of 11 cents.

Analysts polled by Thomson Financial had expected sales of $1.32bn and profits of 9 cents.

Yahoo raised its operating cash flow outlook for the year to a range of $1.775bn to $2.025bn.

Jerry Yang, chief executive, told an analyst conference call that its “extraordinary” results underscored the fact that Yahoo’s strategy and investments were beginning to pay off.

Mr Yang described the quarter as probably one of the most exciting in the company’s history in terms of introducing innovative products.

Yahoo introduced an advertising management platform called AMP during the quarter, which Mr Yang said would help the company gain market share in an online advertising market that would be worth $40bn by 2010.

New tools and services such as Buzz user-voting and video for its Flickr photo-sharing service were added.

The earnings report is being seen by analysts as a benchmark for how Yahoo should be valued and whether Microsoft should increase its offer for the company.

Speaking before the results, Steve Ballmer, Microsoft chief executive, said they would not affect the value of Yahoo to Microsoft. He has set a deadline of Saturday for Yahoo’s board to accept a deal or face Microsoft turning hostile.

The Redmond, Washington company, which reports third-quarter results tomorrow, is likely to launch a tender offer and try to unseat the board at Yahoo’s annual meeting, due by July.

Yahoo has been in talks with Time Warner about an alternative partnership with AOL and is about to end a two-week experiment using Google to provide some of its search advertising.

Yahoo did not give an update on the success or otherwise of the experiment in its earnings statement. Analysts had speculated that it could have increased revenues by 30 to 40 per cent.

The Silicon Valley company’s shares were down 0.6 per cent at $28.36 in after-hours trading in New York.

Yahoo reported a net non-cash gain of $401m related to its share of the Alibaba Group in China following its initial public offering.

The company also received a $350m one-time payment from AT&T for its restructuring of its broadband relationship with the internet service provider for the next four years.