The Wall Street Journal reports Microsoft and AOL executives were expected to meet in Seattle on Wednesday to discuss a possible deal.
News of the talks follows Yahoo's own interest in AOL, which could possibly see the Time Warner-owned AOL rolled into the Yahoo business, and Time Warner taking a minority stake in the combined outfit.
AOL is rapidly losing subscribers to its paid-for internet services and is well behind Yahoo in the internet advertising market. It has shed thousands of staff in response to its poor performance.
Microsoft however may see a slimmed-down AOL as a cheaper way to buy a respectable share of the online market, while hoping the strong AOL brand can be used to build its overall share further.
AOL recently acquired social networking site Bebo, which added 40 million users to its online community, something Microsoft would be interested in too.
Microsoft has complained to US legislators that the closer business ties Yahoo has recently established with Google, following Yahoo's refusal to be bought by Microsoft, are potentially anti-competitive. Which may seem ironic to some Microsoft watchers.
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