First, let me say that Cleveland is a very good baseball team. They are not a fluke and if the Yankees played them 1000 times we'd probably win a little over 50% of the games. So no one should be surprised that Cleveland won a 5 game series.
Second, in one way I am more depressed this year than the previous few seasons since I think the Yankees were better this year than any time since 2003. On the other hand, I am less depressed since moving forward the Yankees are (potentially) in better shape than since early in the Torre era.
With that in mind, here are my thoughts regarding changes during the offseason.
1. I think Torre should go but it has to be handled very carefully. The team is moving to a new generation and it is a good time for a change. His in-game skills are weak. However, if he is unceremoniously dumped then, Mo, Posada, and Pettitte may follow (and it would be a dishonor to a man who has contributed a great deal to the Yankees). He should be given a generous paycheck to become a senior adviser and encouraged to give a farewell speech about how great it is to be a Yankee and how this team is on the verge of something special.
2. Keep Mo, Posada, and Pettitte. This isn't sentiment speaking as all three still make huge contributions at positions where they would be very difficult to replace.
3. Give A-rod a generous extension but if he opts out then wave goodbye. As a commenter in another thread mentioned this may hurt the 2012-2013 Yankees but his contributions right now are too big to forgo at the current price (with Texas holding some of the tab).
4. Offer Giambi to Billy Beane and pay most of his salary.
5. Keep the rest of the lineup as is. Carve a first baseman out of Minky, Duncan and Betemit. Put Damon in left field. Pick up Abreu's option. This lineup will still score north of 900 runs.
6. Keep a Hughes, Pettitte, Chamberlain Wang, Mussina/Kennedy rotation (this the order I expect them to start in next year's playoff series).
7. Get bullpen help for Mo. I think Britton will eventually be a very good 8th inning guy but start him in middle relief. Ohlendorf can be a contributor as well. Farnsworth probably is untradeable. Sign two more quality relievers as the major off season acquisition. I don't know the market well enough yet to make suggestions. Then make sure Torre's successor doesn't destroy any arms.
8. Make reservations for the 2008 playoffs.