The Wall Street Journal reported earlier tonight that Microsoft–in what would be its most aggressive acquisition in the digital space–was zeroing in on buying Skype for $8.5 billion all in with an assumption of the Luxembourg-based company’s debt.

Sources told BoomTown tonight that the deal for the online telephony and video communications giant is actually done and will be announced early tomorrow morning.

The purchase–which has been spearheaded in closely held negotiations by Microsoft CEO Steve Ballmer, with an assist from Business Division CFO Amy Hood and top dealmaker Charles Songhurst–is a bold move for the software giant and its biggest acquisition in more than three decades.

The big price will give Microsoft–which has struggled in its online efforts and has lost billions of dollars for its work–a big brand name on the Web.

With Skype, which has been aggressively expanding, Microsoft will continue to lose money in its Internet efforts. Skype lost $7 million on revenue of $860 million. Operating profits, which Skype preferred to highlight, were $264 million.

And–let us not forget–Skype’s debt is $686 million. Silver lining: That’s slightly less than Microsoft’s Online Services division losses in its most recent quarter!

But, sources said, the concept is bigger than just money, including getting access to Skype’s 663 million registered users.

Skype, which had been headed bumpily toward an IPO until now, will apparently be integrated into Microsoft’s Windows Live and other online communications efforts in both the consumer and enterprise arenas, sources said.

Think Kinect connecting.

Skype has had a big-company owner before–eBay Inc. paid $2.6 billion in cash and stock for it in 2005, as a way for the auction site’s buyers and sellers to communicate.

A 70 percent stake in Skype was sold in 2009 to investors such as Silver Lake Partners, Andreessen Horowitz, and the Canada Pension Plan Investment Board. It then valued Skype at $2.75 billion.

So, obviously, the deal is a big win for them. In addition, at the time they made their investments, Skype was a huge legal mess with lawsuits flying.

Skype has since gotten cleaned up enough to attract Microsoft.

Other suitors have looked at Skype, including Google, although acquisition interest by Facebook was very much overblown, said several sources.

Interestingly, Microsoft’s new smartphone partner Nokia also held meetings with Skype’s CEO Tony Bates, a former Cisco exec who arrived at the company last fall.

Interest in Skype by Microsoft was first reported by GigaOm’s Om Malik on Sunday.

Tune in at 5 am PT for the official press release, apparently, and lots and lots and lots of analysis of whether Microsoft paid too much for Skype.

Charles Songhurst (pictured here), one of Microsoft’s top corporate strategy and M&A execs, is departing the company, according to several sources.

Sources said he was leaving for a new opportunity, and he is not the only big business-development-related departure recently.

Another exec leaving is Senior Director of Corporate Strategy and Acquisitions Fritz Lanman, who TechCrunch reported late yesterday was moving to create a new social start-up called 5Star.

The departure of Songhurst is perplexing, as sources said he has been a favorite of CEO Steve Ballmer.

He also was a key exec in crafting Microsoft’s search and online advertising deal with Yahoo, which was a long and convoluted journey to say the least for the software giant.

But since then, Microsoft has done relatively little in the way of significant acquisitions or big partnership deals, which perhaps might be part of the reason for Songhurst’s departure.

Microsoft declined comment after a BoomTown query.

Recently, BoomTown reported that talks between Microsoft and Yahoo had gotten “hot and heavy.”

That mood seems to be continuing, as many sources close to the situation on both sides said that the pair are coming ever closer to a search and advertising partnership deal.

Said one source: “It’s closer than it has ever been…we’re finally talking about the how rather than the if.”

“It’s meaningful,” added another source. “The fact that there is even progress and engagement, after so many failed attempts between us, says a lot.”

Indeed, it remains a good sign that there seems to be a lot of engagement between the two sides of late, and some sources think a deal could even be struck within the next few weeks.

As I also reported last week, the latest idea is one in which Yahoo (YHOO) would take over both search and display advertising sales and Microsoft (MSFT) would run the tech for both behind the scenes.

It’s not clear if trading other assets–such as content–or an investment in Yahoo by Microsoft are being considered too.

In any case, any such deal would be a major shift for both companies in their business focus and would also tether them tightly together.

Many think they need to be tethered, given that Google (GOOG) overwhelmingly dominates the lucrative search market. Yahoo is strong in display, although that market has been harder hit in the recent economic downturn.

But whether or not Yahoo and Microsoft can come to a partnership agreement–given the deep complexities of the situation, the wariness over controlling key technologies and tense history between them–is a big if, of course.

Still, sources on both sides seem more positive than ever before.

Microsoft execs, for their part, report that new Yahoo CEO Carol Bartz is much more straightforward to work with than former CEO Jerry Yang.

And Yahoo’s side seems convinced that Microsoft appears more willing to make a deal happen and is more flexible on terms than in previous encounters.

Both sides are using very small teams to discuss the possible partnership, mostly in Silicon Valley. Some of the Redmond, Wash.-based Microsoft team, in fact, are in the Bay area now.

Sources said those involved on the Microsoft side include: Digital head Qi Lu, a former Yahoo tech star; top M&A and strategy exec Charles Songhurst; Online Audience Business SVP Yusuf Mehdi; and several others.

On the Yahoo side: North America EVP Hilary Schneider, who leads the efforts; General Counsel Michael Callahan; top Yahoo ad operations techie Mark Morrissey, who was key to its revival of the Panama ad system and has recently been leading product development on its new ad platform; finance SVP and Chief Treasury Officer Mike Gupta; and Products EVP and CTO Ari Balogh, although he is more in the background.

Of course, the only two execs who will matter, if these teams finally manage to hash out details, are Yahoo’s Bartz and Microsoft CEO Steve Ballmer, as well the both companies’ boards.

Interestingly, Ballmer is slated to be at Stanford University’s Memorial Auditorium to give a lecture on innovation and entrepreneurship as part of the Entrepreneurial Thought Leaders Seminar on Wednesday afternoon.

Whether Ballmer is seeing Bartz on this trip or not is not clear.

But he has to at some point. The approval of a deal–which could be struck soon, if terms can be reached–will be entirely their call.

[Postcard image courtesy of CarbonClothing on Zazzle.com.]

Microsoft and Yahoo have been busily ferreting away on talks about search and advertising partnership possibilities in what one person close to the situation described as “hot and heavy.”

But exactly how hot and how heavy depends on which side you are talking to, with Yahoo seeking to play it a bit cooler and Microsoft, according to many sources, aggressively interested in striking a deal.

Nonetheless, sources within Yahoo (YHOO) said that the company is also eager to make what could be a lucrative arrangement with Microsoft (MSFT), which could come sooner than some expect.

Yahoo is not likely to talk about its Microsoft discussions when it announces first-quarter earnings tomorrow.

Yahoo and Microsoft spokesmen declined comment after being queried by BoomTown tonight.

But their execs are talking more, nonetheless, said numerous sources.

In fact, several sources said, Microsoft executives–including a key M&A and strategy exec, Charles Songhurst, and digital head Qi Lu–have been in Silicon Valley recently in talks with Yahoo execs.

Li, who used to work at Yahoo as a top tech exec in search before moving to Microsoft, is playing a key role in the discussions, said several sources.

About two weeks ago, BoomTown first reported that the star-crossed pair were trying to make another go at coming together in the business relationship.

Both Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer, I reported, had even met in person in Silicon Valley.

That meeting went well, said many, and several Yahoo sources said a deal could come, especially if Microsoft and Yahoo can settle disputes over a number of issues.

Those include the size of the large revenue guarantee and payment Microsoft would make in exchange for selling Yahoo’s search ads, and perhaps more, related to search.

In that deal, Yahoo might take over sales of display ads for the pair.

Whether the pair can come to an agreement is anyone’s guess, though, given all the drama between the companies over the last 18 months.

Talks between the pair have “flamed in and out,” said many people at both companies, due to a range of thorny items.

Yahoo is very interested in getting a high TAC rate–basically, a payout to Yahoo on each search query–for example, and also wants to make sure it has rights to all the data related to search.

That’s because some within Yahoo are insistent that search and display need to be closely married together and that it would be dangerous for Yahoo to split them up by outsourcing some of that business to Microsoft.

That said, Yahoo could also save enormous amounts of money it spends on search if Microsoft took over some of the business.

Many point to last summer’s botched offer from Microsoft to Yahoo via current Yahoo board member Carl Icahn, who was fighting with Yahoo at the time in a proxy war, as a way to think about various parts of the discussion.

But, warned the sources, the new talks are different and focus intently on keeping Yahoo independent.

In any case, that search deal offer then included:

– $1 billion for Yahoo’s search business and a five-year guarantee of $2.3 billion in search ad revenue, with an option to renew for another five years at a $1.6 billion minimum

– An offer by Microsoft to buy $3.9 billion of Yahoo shares, and lend the company $2.8 billion at a five percent interest rate, by taking over a part of its debt. The money would be used to give a special dividend to shareholders

– An agreement to raise the TAC rate to 85 percent from the former offer of 70 percent, for three years, and to 75 percent after that

That misbegotten and overly complex offer also included a time constraint, a spinoff of Yahoo’s Asian assets and Icahn getting control of Yahoo in the mix, which is ironic since he is now a Yahoo insider.

In other words, a lot of water has flowed under the Yahoo-Microsoft bridge.

It has to, as many think it important that the two are partnered closely together in search and display advertising, even though they still compete on many other fronts in the Internet space.

By joining their forces, they might create a sale that is much more attractive to advertisers and allows for better competition against search powerhouse Google (GOOG).

This is especially true given that Yahoo is the No. 2 player in search, for example, with a much larger share than third-place Microsoft. According to recent surveys, Google has a 63 percent share, while Yahoo has 20.6 percent and Microsoft eight percent.

But it is also in Yahoo’s interest to move fast, since its search traffic could be declining soon, according to some analysts.