While speculation runs rampant, it was enough to boost Yahoo's stock up 3.7 percent to $27.80 in mid-day trading. Microsoft shares dipped 1.1 percent to $29.08 per share.

"Yahoo's not a strategy, it's a part of a strategy," Ballmer reportedly told employees at a town hall meeting on Thursday, according to The Silicon Alley Insider. "We're interested to pay for it at some level and beyond that level we're not willing to pay for it. I know exactly what I think Yahoo is worth and I won't go a dime above."

"You gotta be willing to look outside of the box and Yahoo is $44 billion outside of our box," he said. "If Yahoo doesn't happen, there's a number of other things we'll look at."

Ballmer's talk with employees marked the first time the company acknowledged Yahoo's silence in not responding to a Saturday deadline to accept or decline Microsoft's $31 per share offer.

"[We] missed the deadline but we're in the process," Ballmer reportedly said to employees. "We've got basically the three big options in front of us. There's the friendly deal, there's an unfriendly deal, and the third path is simply to walk away. Given it's just a part of a strategy -- if neither of those look good, we walk away. It makes sense at the price we proposed and I think it's a good deal for Yahoo shareholders. It's a huge premium it's one of the largest valuations."

On Wednesday, the Redmond, Wash.-based company's board of directors met and let Ballmer off the leash, giving him "broad discretion to either go hostile or abandon the Yahoo pursuit," The Wall Street Journal reported.

When an employee asked Ballmer what made Yahoo so attractive to Microsoft, he reportedly said that Microsoft is not "the leading player," and that there are "structural things in the industry that make it hard to make rapid progress."

"We need to gain scale," he said. "The world is rooting for us. The world hopes that there's a very strong company that's not the number one guy. We're going to work that strategy with Google, with Yahoo or without Yahoo."