Yahoo announced this morning that agreed to expand its board from nine members to 11, adding activist Carl Icahn, to its board as well as two people from Icahn’s list of board candidates, thereby ending the Icahn’s proxy fight.

So the question becomes what happens now?

Icahn had been hoping to replace Yahoo’s management team so he could then negotiate a sale of the company to Microsoft.

The fact that Icahn settled for less than full control of Yahoo may suggest that he’s no longer hell bent on a sale Yahoo to Microsoft and may be willing to support its deal with Google

“A deal with Microsoft isn’t dead but it’s certainly less likely over the near-term,” said Scott Kessler, an equity analyst with Standard & Poor’s.

Kessler, added though, that he did not expect Microsoft to go away for good.

“Microsoft has pursued Yahoo now for the better part of two years. Just because their ally Carl Icahn has aligned himself more squarely with Yahoo’s management does not mean that a deal won’t eventually happen,” he said.

According to reports if recent history is any guide, Icahn might actually be able to convince Yahoo to start talking to Microsoft again.

Last year, software company BEA Systems rejected a takeover bid from Oracle, but after Icahn, BEA’s largest individual shareholder, threatened to launch a proxy fight for the company’s board, BEA reconsidered and wound up agreeing to sell out to Oracle.

Stifel Nicolaus analyst George Askew suggested in a report Monday morning that the presence of Icahn on the board could entice Microsoft to make another offer to Yahoo.

“The new board structure may bring Microsoft back to the negotiating table to discuss a major transaction with Yahoo including the acquisition of the company or the acquisition of Yahoo!’s search business,” he wrote. “The settlement provides an opening for Microsoft to reopen talks.”

At the very least, Yahoo will need to make some big changes. Raising a ruckus before finally compromising may be Icahn’s MO as of late – but he also has shown that when he settles with a company, he expects immediate action.

Two years ago, Icahn sought to break up Time Warner and went as far to name a list of candidates for the company’s board.

Icahn ultimately decided to drop that proxy fight as well. But Time Warner wound up agreeing to many of Icahn’s demands. It increased its stock buyback program and announced plans to aggressively cut costs.

And earlier this year, Icahn dropped his proxy battle for Motorola a few weeks after the company decided to spin-off its cell phone business, a move that Icahn had been advocating for more than a year.

So Yahoo is going to need to prove to Icahn that it does have a strategy to get back on track.

Askew wrote that Yahoo could announce plans to sell off its Asian Internet assets and launch a big stock buyback program as soon as tomorrow, when the company is set to report its second-quarter results.

Yahoo really disappoints Wall Street when it reports earnings tommorow, Icahn may put more pressure on his future fellow board members to oust Yang.

“One of Icahn’s refrains had been that he wants Yang replaced with a more experienced CEO since Yang, while a great engineer, is not a manager with operational acumen,” Kessler said. “Change at the top is something that might be sought after if Yahoo has a bad quarter.”

So the plot keeps twisting and turning and no one know where it will all end up

Today in trading, Yahoo is down about 3%.