Talks that have been on and off since earlier this year are on again, but some obstacles remain, according to the Financial Times.
A partnership between Microsoft and Yahoo would strengthen both against Google in the highly competitive online search and advertising arena.
Microsoft stands to gain Yahoo's search and advertising business and expertise in return for a share in future advertising revenue and backing in the technology race with Google.
Microsoft has eased some of Yahoo's concerns by agreeing to allow continued access to data about searches and through the positive market response to its Bing search service.
But, differing expectations about the amount of cash Microsoft would have to pay up front to seal an agreement have yet to be resolved, according to the FT.
Yahoo shareholders are less likely to accept a deal with Microsoft without a large payment, the Financial Times said, citing a source familiar with the discussions.
In May, Yahoo chief executive Carol Bartz said any deal with Microsoft would take a "boatload of money".
Bartz also said executives have a responsibility to consider any offer and whether it is in the best interest of shareholders.