This marks the end of the browser wars that erupted at the end of the 1990s as Microsoft battled to get to grips with the development of the Internet.
As part of the deal, AOLTW's America Online Internet division will receive a royalty-free, seven-year licence to use Internet Explorer with AOL's client software, the companies said.
They will also work together to make their respective instant messaging clients work together, though "no time frame has been set for that", Microsoft chairman and chief software architect Bill Gates said.
The industry giants will also collaborate on long-term initiatives for distributing digital media to consumers, and to support new business models for content owners. Microsoft will further provide AOL with a new worldwide distribution channel for software to certain PC users, and provide technical co-operation and information "to ensure the best possible AOL member experience on current and future Microsoft operating systems".
The antitrust suit alleged that Microsoft harmed Netscape's browser business through anticompetitive practices related to the Windows operating system. It was filed after a US District Court ruled that Microsoft engaged in anticompetitive practices in violation of federal antitrust law and illegally used its Windows operating system monopoly.
Using that case and the subsequent appeal ruling that upheld the District Court findings, Netscape argued that Microsoft's practices "resulted in harm to competition and antitrust injury to Netscape in particular".
Industry experts were not surprised at the deal. Analyst David Smith of Gartner said, "We've been on the record predicting that these two companies are far more likely to end up as partners than competitors."
Mark Ostrau, a partner and chair of the antitrust practice at Fenwick & West agreed. "It was in neither party's interest to go through a protracted legal battle here," he said.
AOL was "staring in the face of a very long and protracted legal battle with Microsoft for which most of the management probably had little appetite. They needed to solve problems today, and this case was not going to be resolved any time soon," Ostrau said. "Microsoft got off cheap," he added.
One aim of the agreement is to develop what the companies call a "digital media environment" that is free from piracy, open to companies across various industries and provides consumers with access to content. AOLTW will use Microsoft's Windows Media 9 Series and future software to create, distribute and play back digital media under a long-term, nonexclusive aspect of the deal.
"We've not been able to get our arms around the piracy issue, and I think by agreeing to work co-operatively together we can begin to … create a world where content can be distributed digitally to consumers," Parsons said during the press conference.
The deal further underlines AOLTW's move away from technology development, said Matt Rosoff, an analyst with Directions on Microsoft. "I think that AOL's current management is not interested in being a technology company," he said.