Microsoft and Yahoo have turned a corner and are finally negotiating in earnest about their possible merger, although a deal is far from imminent, according to media reports.

In anonymously sourced stories published online midafternoon Friday, both The New York Times and The Wall Street Journal reported that talks between the companies have suddenly gathered steam.

[ For complete, ongoing coverage of Microsoft's bid to take over Yahoo, check out InfoWorld's special report. ]

It has been three months since Microsoft announced its cash-and-stock bid for Yahoo, valued then at $44.6 billion but now worth about $42 billion because Microsoft's stock has lost value.

At the time, Microsoft's management sounded confident that the acquisition would proceed swiftly, but Yahoo's board threw back the offer in Microsoft's face, saying it undervalued the company.

Since then, talks between the companies have reportedly been few and unproductive, as Yahoo sought alternative deals and Microsoft threatened to go hostile or, lately, to walk away.

As Yahoo let lapse Microsoft's deadline to wrap up negotiations on Saturday, everyone with a stake in the deal has been anxiously awaiting Microsoft's next move.

As recently as Friday morning, consensus was that Microsoft would announce a hostile takeover strategy, such as launching a proxy fight to replace Yahoo's directors with its own slate of candidates that shareholders could elect at their next annual meeting.

However, now it appears that the companies have made progress over the so far apparently insurmountable disagreement over price, prompting Microsoft to stay at the negotiating table in the hopes of reaching a friendly deal.

According to The Journal, Microsoft indicated this week it would be willing to raise its bid to as much as $33 per Yahoo share, below the $35-per-share minimum that major shareholders are hoping for.

Microsoft's offer is currently valued at about $29.30 per share, according to The Times, whose sources said that a $34-per-share offer could be a happy medium and get the deal done.

"These companies are legitimately wrestling with complex issues and the fact that they've finally come to the table suggests that they're making progress in resolving at least what their positions should be," said Gartner analyst Andrew Frank.

Both companies have been clear in outlining their goals and reservations, he said. Microsoft wants to quickly gain scale in Internet advertising, and Yahoo wants to get the full value for its business, Frank said.

Of course, if they reach an agreement and the acquisition happens, they'll be far from home free. For starters, Microsoft will then face the complex and potentially lengthy task of integrating its Internet unit with Yahoo, Frank said.

"There's definitely a lot of risk and complexity around the integration. That will clearly be a key area of focus both parties will have to concentrate on if they're going to make this a successful transition for both of them," he said.

This story was updated on May 2, 2008