The negotiations have gone on as Microsoft awaits a verdict in its appeal of a federal judge's ruling to break the company in two.
At the same time, the company said it will spend US$50 million on ads urging America Online customers to switch to MSN because AOL is raising rates.
The company also is looking to woo users of AOL's popular instant-messenger program though software that can make telephone-like calls to PCs.
Other products that would compete with AOL include services such as digital-photo developing and travel reservations that are part of Microsoft's .Net Internet strategy for using the Web to connect PCs, Web sites and electronic devices.
Some analysts said AOL might one day end up being bundled with Windows even if the current round of talks fail.
The America Online software could be wrapped into later versions of the program, said JP Morgan analyst Paul Noglows.
America Online could also sign agreements directly with PC makers to get the software on their machines.
"The jury is still out on whether it will happen," said Christian Koch, an analyst at Trusco Capital Management, which owns shares of Microsoft. "My bias is that AOL locks themselves out of the long-term business opportunity if the talks fail."
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