Yahoo surprised analysts yesterday, announcing that it is on track to meet its expected earnings for 2008. This changes the fight between the Sunnyvale-based company and Microsoft, which recently offered to pay $42 billion to swallow it up. Now Yahoo has a bit more leverage, and may be able to convince investors that it’s not in such bad shape after all. The company says it expects to double its cash flow and increase its revenue by 50 percent, mostly from banner and video advertising. But it’s not clear at this point whether the good news is going to force Microsoft to up its bid.

Google CEO Eric Schmidt recently blasted the proposed deal, saying that it could stall the free flow of information on the Internet. But you have to wonder if maybe he doesn’t just have the interests of the people in mind. A Microsoft-Yahoo merger would give the search king some serious competition.