The talks centre on a deal that would merge internet into , according to a report in The Wall Street Journal.
If it happened, the deal would give Time Warner a large minority stake in the combined Yahoo! and AOL.
Yahoo! was reported to have restarted discussions with AOL three weeks ago, having previous held talks in the past that came to nothing.
The WSJ reports that Yahoo! went back to Time Warner to ask for a proposal that it could take to its directors.
Time Warner is said to be putting the finishing touches to a firm proposal now, which could create cost savings of around $1bn.
Key to the talks is creating a strong online ad business, including AOL's Advertising.com business.
The AOL deal is one of two alternatives that Yahoo! appears to be pursuing, having also held talks with News Corporation about merging MySpace with Yahoo!.
In a similar setup to the Time Warner deal, News Corp would hold a large minority stake in the combined business.
However, many observers still see Microsoft as the best bet for Yahoo!. Earlier this week it emerged that Microsoft was considering putting forward its own slate of directors to join the Yahoo! board. The deadline for board nominees is March 14.
There is talk that Yahoo! could try and push that deadline back, but it is under pressure from a number of shareholders who have launched lawsuits because of its failure to accept the software giant's offer now valued at $41bn.